Business Spend Management
October 30, 2019

Mitigating Purchasing Fraud Risks For Growing Startups

Written by
Jessica Malnik

As startups grow, the risk of fraud also grows. 

The more transactions a company has, the more they expose themselves to these risks. Increasing transaction volume is unavoidable, and having multiple employees, vendors, and subscriptions with access to high-limit corporate cards makes companies more vulnerable to fraudulent charges and attacks.

In this post, we’re going to take a look at purchasing fraud and how using Airbase can help startups minimize the threat. 

What is purchasing fraud?

Purchasing fraud is essentially a violation of the procurement terms. This is why you’ll often hear it referred to as procurement fraud.

The more transactions — the more opportunity for risk. Here are some of the common types of purchasing fraud to watch out for in growing startups.

Payoffs and kickbacks

Suppliers can bribe employees to choose them for a purchase. To accept the kickback, the person in charge of purchasing might buy unnecessary goods or services, approve an unqualified supplier, or write the item specs so only the bidder offering the kickback will qualify.

Shell companies

Sometimes, companies are charged for fake orders or goods they've never received. If companies don’t have a purchasing process in place, or the process is decentralized, fake orders or services from fake companies are easily overlooked. 

Bid rigging

It’s possible for suppliers to work together to inflate prices during a bidding process. In these situations, suppliers submit high bids to benefit one of the bidders. Often, the winner has subcontracted the other bidders, so they all get a piece of the higher price.

Invoice and credit card fraud

This can include anything from a vendor or employee deciding to go on a shopping spree with a corporate card or a more complex scheme involving duplicate invoices, additional charges, or bills for services never delivered. 

Minimize the risk of fraud with Airbase

The best line of defense against fraud is having a reliable spend management software, such as Airbase, in place. Airbase helps finance teams keep a tight rein on expenses with spend controls, routine reports, and vendor-specific virtual cards. 

Pro Tip: To spot potential fraud early on, look for strange employee behavior such as a lack of concern about quality or refusing to look at bids from anyone other than their preferred supplier. Being the only point of contact for a supplier or receiving high invoices after negotiations can also be a red flag.

Approvals and Virtual Cards

Airbase uses virtual cards to streamline the purchasing process. A virtual card, issued within seconds for online purchases, replaces other payment methods like corporate cards, ACH transfers, and physical checks. 

Employees simply send a spend request through the cloud-based platform and receive a virtual card when their manager or finance team approves the request. 

With a streamlined pre-approval to virtual card process, finance teams stay in the loop of all purchases and can keep an eye out for suspicious vendors, bid rigging, or credit card fraud. 

YourMechanic, for example, used Airbase virtual cards to minimize their exposure to purchasing fraud by creating unique virtual cards for every purchase. 

Before Airbase, they were processing more than 500 transactions per day through one corporate card and logged transactions in a shared Google spreadsheet. It got to the point where they had a 50% error rate on their GL, and had to get a new corporate card every two months because of fraudulent transactions. Using the same card at hundreds of vendors nearly guarantees that your card details will fall into the wrong hands.

Spend Controls

When approving virtual cards for purchases, finance teams have the ability to set controls in Airbase to add in extra card protections. 

For example, teams can set spend limits and transaction limits to minimize damage from fraudulent purchases. The added layer of control also helps protect the company against unauthorized charges. 

Additional spend controls:

  • Custom expiration dates (i.e. You can schedule card expiration dates to prevent automatic renewal charges.)
  • Assign virtual card ownership (i.e. Give every subscription a billing owner that's easy to find.)
  • The Airbase vendor portal gives approved vendors a secure, self-service to upload invoices and other financial documents.

With virtual cards and spend controls, “fraud isn’t a problem anymore because incidents are isolated to the unique virtual card created for that vendor,” Diana Ngo, Senior Director of Finance at YourMechanic, tells us.

Reporting 

Combining an approval system with virtual cards can also automate much of the reconciliation and reporting work for accounting teams and controllers.

Rules can be set to automatically code recurring expenses to the correct expense account in the general ledger. The process is not only more efficient but also transparent.

Having all spend requests, approvals, billing owners, and transactions live in a single system makes it easy for finance teams to track transactions back to the exact vendor, employee, spend request, and approvers.

Conclusion

For startups, the best way to mitigate fraud risks is to put a purchasing system in place and monitor transactions. Using virtual cards with controls and a pre-approval system can mitigate the risks that using a corporate card introduces to the procurement process. The more transactions your company has, the more it can benefit from using a spend control platform like Airbase.