How I Document Vendor Approvals to Avoid Fraud and Audit Findings

The risk I worry about most

In AP, the biggest danger is not a calculation error—it's paying the wrong party, paying twice, or paying without proper authorization. Those issues escalate into fraud investigations and legal exposure fast. The financial and reputational damage from vendor fraud can be devastating to an organization, which is why I treat every vendor relationship with the highest level of scrutiny.

My approval workflow (simple but strict)

• Vendor onboarding: I require a verified legal name, tax ID, and payment details. If bank details change, I verify via a second channel (not the same email thread). This includes requesting W-9 forms for tax purposes and verifying business registration documents.
• PO discipline: If a purchase requires a PO, I don't "make exceptions." Exceptions become the norm. I ensure that all purchases follow the proper authorization hierarchy based on dollar thresholds.
• 3-way match when possible: PO, receiving evidence, and invoice. If we can't do 3-way, I document why and who approved the bypass. This is critical for ensuring that we only pay for goods and services actually received.
• Approval evidence: I keep the approval artifact (system approval, signed email, or ticket). "I told you on Slack" is not evidence. I maintain a paper trail of all approvals with timestamps and signatures.
• Payment run controls: Dual review of payment file totals and top vendors by amount. I spot-check bank account digits on high-value payments. This includes segregation of duties between those who prepare payments and those who authorize them.

Enhanced vendor verification procedures

To prevent vendor fraud, I implement multiple verification layers:

Vendor Master File Maintenance: I regularly review and clean the vendor master file to remove duplicate vendors and inactive vendors. This includes running reports to identify vendors with similar names or addresses that might indicate fraudulent activity.

Vendor Due Diligence: Before onboarding a new vendor, I verify their business registration, check references, and confirm their legitimacy. For high-risk vendors, I may request additional documentation such as insurance certificates or bonding information.

Address Verification: I verify that vendor addresses are legitimate and not PO boxes or personal addresses. I also check that invoices are sent from the same address as the vendor's registered business address.

Red flags I watch for constantly

• Unusual payment requests: Changes to payment methods or bank accounts, especially if requested via email
• Round number invoices: These often indicate fraudulent invoices designed to blend in
• Missing documentation: Invoices without proper supporting documentation should trigger additional scrutiny
• Rush requests: Vendors who demand immediate payment without standard processing
• Unusual vendor relationships: Vendors with connections to employees or management that could indicate conflicts of interest

Documentation requirements for different transaction types

Different types of transactions require different levels of documentation:

Service Contracts: Contract with scope of work, start/end dates, and payment terms Goods Receipts: Receiving reports, delivery confirmations, and inspection certificates Professional Services: Time logs, deliverables confirmation, and performance assessments Recurring Expenses: Original contracts, renewal approvals, and service level confirmations

Technology tools for vendor management

I leverage technology to enhance vendor approval controls:

• Vendor portals: Secure platforms where vendors can submit invoices and update information
• Automated matching: Systems that automatically match POs, receipts, and invoices
• Approval workflows: Electronic routing based on dollar thresholds and approval authorities
• Duplicate detection: Systems that identify potential duplicate payments before processing
• Vendor screening: Tools that check vendors against sanctions lists and fraud databases

Segregation of duties best practices

Proper segregation of duties is essential for preventing fraud:

• Vendor setup: Separate from invoice approval and payment processing
• Invoice approval: Separate from payment authorization
• Payment processing: Separate from bank reconciliation
• System administration: Separate from transaction processing
• Check signing: Separate from invoice preparation

Vendor communication protocols

Clear communication prevents many issues:

• Change notifications: Vendors must provide written notice of any changes to payment information
• Verification procedures: All change requests must be verified through multiple channels
• Standard operating procedures: Clear guidelines for all vendor interactions
• Escalation paths: Defined procedures for handling vendor disputes or concerns

Periodic vendor reviews

I conduct regular reviews of vendor relationships:

• Annual vendor verification: Confirming all vendor information is current and accurate
• Payment pattern analysis: Looking for unusual trends or patterns that might indicate fraud
• Performance evaluations: Assessing vendor performance and contract compliance
• Relationship mapping: Identifying any potential conflicts of interest

Vendor termination procedures

When ending vendor relationships, I follow strict procedures:

• Final invoice review: Ensuring all invoices are properly processed
• Contract closeout: Completing all contractual obligations
• Final payment verification: Confirming accuracy of final payments
• Record retention: Maintaining all documentation per company policy
• System cleanup: Removing vendor from active vendor lists

Training and awareness programs

I ensure all staff involved in vendor management receive proper training:

• Fraud awareness: Understanding common fraud schemes and red flags
• Policy compliance: Knowledge of company policies and procedures
• Documentation requirements: Understanding what documentation is needed
• Ethics training: Maintaining high ethical standards in vendor relationships
• Continuous education: Keeping up with evolving fraud techniques

Audit preparation and compliance

Preparing for audits starts with daily procedures:

• Organized files: All vendor documentation properly organized and accessible
• Consistent processes: Following the same procedures consistently
• Complete documentation: Ensuring all required documentation is collected
• Policy adherence: Following all company policies and procedures
• Regular testing: Periodically testing controls and procedures