The Phantom Vendor

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

I’m looking forward to answering the door on Halloween.  Some of the princesses, superheroes and ghosts look a lot like our neighborhood kids, and some I just don’t recognize at all.  It doesn’t matter who’s behind the mask, though, everyone gets candy.

Trick-or-treaters are fun on Halloween, but not so much in your finance office.  In your nonprofit, you need to know exactly who you are paying.  Unfortunately, phantom vendor schemes are among the top three ways fraud perpetrators victimize nonprofits today with average losses of $100,000. *

Here’s a story about phantom vendors:  A Washington DC association received a phone call from their bank.  Apparently, the association’s administrative assistant had been depositing checks from the association into multiple accounts that she controlled.  The bank wondered why the association would be paying one woman under several different names? 

The association looked into the matter and discovered that this “long-time, trusted employee” had “exploited every gap in their system” with a phantom invoice and phantom vendor scheme.  Apparently, she got checks written using false invoices from real vendors.  Check signers returned the checks to her.  Then she deposited the checks into the bank accounts for her phantom vendors, that had names similar to the real vendors.

But wait, there’s more.  She also submitted invoices to the organization from her own side business, another phantom vendor, which did no work for the organization.  She left these payments off her budget reports.   

In November 2013, Ephonia Green, a former administrative assistant at the Association of American Medical Colleges, pleaded guilty to embezzling more than $5 million from her association over a 9-year period.  Until her arrest, she lived in a mansion and drove a fancy car.  She was sentenced to 16 months in prison.    

The association further said they would “apply the lessons we have learned from this experience, as well as share them with others in the nonprofit community.”

What Can We Learn?

Next time you’re asked to approve an invoice, remember that fake invoice schemes are among the most frequent ways perpetrators steal from nonprofits. *    

Control who can set up new vendors.  If your software allows special permission to set up a new vendor, limit that access to someone who does not approve invoices.

Know what you’re approving.  Be sure people approving invoices know what’s been received.  Look into invoices for unfamiliar services.

Treat signed checks like money.  Don’t return signed checks to the person who keeps the books. 

Separate invoice approval from both bookkeeping and check signing.  If one individual can approve invoices and sign checks, at least make sure an independent person reviews the bank transactions online to look for large unexpected payments.

Set up online bill pay with two levels of permission.  One person can prepare payments and another can release them.

Small organizations may need to enlist Board members to help with anti-fraud controls. If a second employee is not available to review and approve a transaction, a Board member may need to step in to review and approve. Online processes make it easier to log in and oversee transactions.

Learn more about fraud prevention controls and the most common types of nonprofit frauds in our 501(c)(fit!) PLUS on-demand webinar, You Just Lost $1 Million—fraud prevention for CEOs.

Fraud perpetrators often masquerade as trusted employees.  Learn how to tune up your fraud antennae in our FIT! TIP from October 10, 2017—Behind the Mask. 

Ghost employee schemes are one of the top three frauds victimizing nonprofits today.  Read a fraud ghost story in our FIT! TIP from October 16, 2017—Do you have ghost employees? 

 One in five nonprofit frauds involves theft of incoming checks.* Find out how in our FIT! TIP from February 27, 2017—Spare Change.  

Get more FIT! TIPS.  Join our 501(c)(fit!) community.

*yes, it’s true, per the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2106 Global Fraud Study. 

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