When Your Vendor Becomes Your Thief: How Small Businesses Get Burned by Vendor Fraud

You trust your vendors. They deliver materials, provide services, and send invoices. In theory, you pay them in a timely manner and all is well. But what if one of those invoices is fake? Or the vendor is colluding with one of your employees to overbill you month after month?

That’s vendor fraud. It's one of the most common, costly, and least-detected types of business fraud. The losses aren’t always obvious, but over time they drain profits, distort financials, and quietly erode your trust.

The Ugly Truth About Vendor Fraud

Small businesses are especially vulnerable because they often lack strict internal controls or segregation of duties. A single person may approve vendors, process invoices, and reconcile accounts, which makes it easy for manipulation to go unnoticed.

As a Certified Fraud Examiner, I see the same patterns repeat themselves across different industries. The names change, but the schemes don’t.

Here are some of the most common vendor fraud tactics:

1. Fake Vendors

An employee sets up a bogus company, submits invoices for “services,” and pockets the payments. The fraud might continue for years, until someone finally questions why “ABC Consulting” has no real address or website.

2. Overbilling and Duplicate Invoicing

A real vendor submits inflated or duplicate invoices, counting on your accounting team not to notice. Without proper cross-checks, you could easily pay twice, or pay for work never done.

3. Kickbacks

This is where an internal employee and an outside vendor strike a deal. The vendor charges inflated prices, and the employee gets a “cut” under the table. It’s corruption, plain and simple, and it’s more common than most owners realize.

4. Product Substitution

Vendors deliver cheaper or inferior goods than what was agreed upon, billing you for higher-quality items. Unless someone inspects the shipments closely, you’re paying for something you didn’t receive.

5. Bid Rigging and Collusion

When multiple vendors coordinate to fix prices or manipulate bids, your “competitive” process becomes a sham. This often happens in construction, professional services, or procurement-heavy industries.

How to Protect Your Business

Vendor fraud isn’t random. It thrives where oversight is weak. Here’s how to fight back:

1. Vet Every Vendor

Verify tax IDs, addresses, and ownership. Cross-check new vendor information with your employee list to make sure you’re not paying a company owned by one of your own people.

2. Separate Duties

No one person should control vendor setup, invoice approval, and payment. Rotate responsibilities periodically to deter fraud and catch errors early.

3. Review Invoices Critically

Watch for:

• Round-dollar invoices (no cents)

• Sequential invoice numbers

• Vague descriptions like “consulting services” or “miscellaneous work”. These are red flags worth digging into.
  

4. Audit Vendor Payments Regularly

Run reports by vendor name, address, and bank account number. Duplicate matches are often the first clue of a problem.

5. Create a Speak-Up Culture

Make it safe for employees to raise concerns without fear of retaliation. Many fraud cases are uncovered through tips, not audits. You may consider using a third party a whistleblower may feel more comfortable using.

Don’t Wait Until It’s Too Late

Vendor fraud doesn’t usually start big. It normally starts with a single fake invoice or a friendly “favor” that grows into something much worse. Once the pattern sets in, losses compound quickly.

If something doesn’t feel right with your payables, trust your instincts and get a professional opinion before it becomes a six-figure problem.

Need Help?

At Blevins Associates Consulting, we specialize in helping small and mid-sized businesses uncover and prevent occupational fraud, including vendor and billing schemes.

If you suspect a problem, or want to strengthen your internal controls, let’s talk. Schedule a confidential consultation at www.blevinsassociates.com or contact me directly to discuss your situation.