A universal risk to companies that employ individuals and engage outside vendors are vendor billing schemes. The most recent instance to hit the news is an alleged kickback scheme involving advertising services provided to Rite Aid.
The Central Penn Business Journal (“CPBJ”) reports that a former Rite Aid Vice President of Advertising has tentatively agreed to plead guilty to wire fraud and federal income tax evasion charges associated with a vendor kickback scheme. Allegations described in the CPBJ article describe:
- Rite Aid paid approximately $45.3 million to Nuvision, Inc., a consumer electronics company, between 2001 and 2017
- The Rite Aid executive in question approved payment for the related invoices, some of which were false/inflated
- This Rite Aid executive received at least $5.1 million in kickbacks and directed over $600,000 be paid to other Rite Aid employees
A strong system of internal controls can minimize the risk of this type of vendor fraud and/or identify red flags to catch it when it occurs. Generally, segregation of duties is considered one of the most important tools, but in some cases the fraud prevention and detection related benefits of segregation of duties can be circumvented by involving multiple employees in the scheme.
Another important tool is monitoring vendor activity over time. Ongoing monitoring activities include trend analysis by vendor and expense type. This type of monitoring, which can be accomplished electronically, can flag for further explanation expenses that are outside of established norms based on expense levels or timing, using budgeted amounts, benchmarking and ratio analysis.
A whistleblower system is also effective in battling fraudulent activities. Other employees might be suspicious or have direct knowledge of a fraud, but be hesitant to report it directly. This often occurs when those involved are in powerful positions within the company.
Internal controls should be diligently applied and employees should generally be aware that oversight is occurring (although the specific details might not be shared). This reduces the “perceived opportunity” aspect of the recognized fraud triangle. It is far better to deter fraud than to later catch it. Once identified, many companies will hire an outside forensic accountant to document the extent of the employee malfeasance for restitution, civil litigation or insurance claims.