Should You Rethink Your Vendor Relationships?
There’s a saying that you’re known by the company you keep. If your business relies on at least one supplier, your vendor network is being viewed as an extension of your organization. Even if your suppliers were recommended, it’s vital to understand the critical steps of vendor vetting not only for your company’s reputation, but to improve and safeguard controls to avoid costly future mistakes.
The Importance of Vendor Vetting
According to the Association of Certified Fraud Examiners, 51% of organizations have uncovered more fraud since the onset of the pandemic. Consequently, companies are discovering the criticality of continued, even increased, vigilance in monitoring vendor and supplier activities and billing.
As important a concept vendor vetting is, most companies do not do it well, if at all. To be effective, questions asked before engaging in a relationship with a vendor should include:
· Is the vendor a legitimate supplier of goods and/or services?
· Is the vendor qualified to provide those goods or services?
· Is the vendor brand new or have they a proven track record of quality?
· Is the vendor solvent or are they experiencing financial problems?
· If applicable, does the vendor have adequate insurance and a good safety record?
· Who are the vendor company owners and are they trustworthy?
· Is the vendor a previously barred or fired vendor, perhaps under another name, or owned by another company that was barred or fired?
· Are there any indications of potential conflicts of interest with company employees?
· Are there any legal or regulatory actions pending against the vendor or its owners?
Quickly and efficiently answering these questions can mean the difference between enjoying a successful relationship with our suppliers and having serious quality issues in delivering your products and services.
When Should Vendor Vetting Occur?
Ideally, vendors should be vetted before entering into a contract with them and integrated into the supply chain management program as a consistent and critical step.
However, vetting of vendors isn’t a one-time occurrence, it should be an ongoing expectation. This is particularly true of critical vendors or vendors where suspicion of issues exist. An effective program also will periodically re-vet existing vendors in use or ones that have been idle for some time.
Read on for real-world examples where Stinnett’s vendor audit experts recently identified situations that cost millions of unnecessary dollars.
FRAUD CASE 1
As part of vendor analytics, our team noted red flags with a vendor including a potential conflict of interest (client’s employee responsible for approving vendor invoices had same last name as vendor’s owner), no contract in place with vendor, and invoices which lacked any supporting documentation. The employee later admitted the vendor’s owner was his father. Invoices totaled $2.7 million, none of which were for legitimate work. The manager concealed the fraud in part by spreading the costs over numerous cost centers.
FRAUD CASE 2
During the course of an investigation, our team found that the client PM responsible for overseeing the work of a vendor held a 20% ownership interest in that vendor’s business. The vendor later admitted having over-billed our client approximately $450,000.
FRAUD CASE 3
During another investigation, our team found that the client PM responsible for overseeing the work of a vendor was married to the owner and sole employee of the vendor, which had invoiced the client a total of $1.2 million for what appeared to be legitimate services.
FRAUD CASE 4
A hotline allegation resulted in identification of scheme where certain employees of the client owned a manufacturing operation and had arranged for the client to order approximately $2.3 million of the manufactured equipment items through a third-party intermediary reseller. There was collusion between employees in different areas of the client’s business which enabled them to circumvent controls.
Benefits of Outsourcing Vendor Vetting
Do you need help designing a system of controls that can significantly improve your ability to effectively manage and monitor your vendors? Stinnett’s team are experts in evaluating vendors for red flags and conflicts of interest. Customized data analytics and risk scoring methodology give our clients the insights needed to make supplier decisions that help protect against risks.
1. Guaranteed 24-hour deliverable per vendor
2. Customized Data Analytics and Risk Scoring Methodology to better inform supplier decisions
3. Diversity Credit: In many states, partnering with a WBENC-certified WBE like Stinnett can provide your company with tax incentives.
Stinnett & Associates is not a CPA firm.