The Phantom Vendor

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

I love answering the door on Halloween.  We get a lot of princesses, superheroes and ghosts who look a lot like our neighborhood kids, along with 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 five ways fraud perpetrators victimize nonprofits today, and are nearly three times as likely in smaller organizations according to the Association of Certified Fraud Examiners. *

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 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.

New to overseeing the finance function?  Gain a practical overview for new execs in our live two-day seminar, Financial Leadership Training for Emerging Nonprofit Professionals coming up soon in Alexandria.

Learn more about fraud prevention controls in our in our next-level seminar, Raising the Bar – Preparing for Higher Expectations; Continued Financial Leadership Training for Emerging Nonprofit ProfessionalsWe’ve got a helpful session called You Just Lost $1 Million—a guide to fraud prevention.

Fraud perpetrators often masquerade as long-time trusted employees.  Learn more about fraud perpetrators in our FIT! TIP from October 10, 2017, Behind the Mask.

Read more FIT! TIPS.

Join our 501(c)(fit!) community so you won’t miss another FIT! TIP.

*Many attribute these words to Charles Darwin, but it’s really a paraphrase from 1963 by Leon C. Megginson, a university business professor.

©2018 501(c)(fit!) All Rights Reserved.