Phantom Vendors

One method of fraud involves payments to fictitious companies for goods never delivered or services never provided. To protect against this, public entities need procedures in place to determine whether new vendors that are added to their accounts payable system are legitimate.

The ability to set up new vendors on the accounts payable system should be limited to those individuals with a logical need for this function. When new vendors are added to the system, the vendors should be reviewed by someone outside the accounts payable system. The outside reviewer should verify that the new vendor is legitimate. Finally, the vendor list should be reviewed periodically, and unused vendors should be removed from the system.

This fraud is more likely to occur when a public entity has a large number of vendors. Warning signs of a potential “phantom vendor” include:

  • Sequentially-numbered invoices from the vendor;
  • Invoice amounts just below the amount needing additional approval for payment; and
  • Companies with only P.O. Box addresses, companies lacking taxpayer identification numbers, or vendor identification numbers that match an employee’s social security number.

Date this Avoiding Pitfall was most recently published: 07/31/2020