16 Ways to Identify Fictitious Vendors in Your Accounts Payable Process

Fictitious vendors are one of the most common and costly forms of accounts payable fraud. These schemes often involve employees creating fake vendors and issuing payments for goods or services that were never provided. Because they are embedded within routine AP activity, fictitious vendor schemes can persist for long periods without detection, leading to a significant amount of financial loss and negatively impacting a company's cash flow.

This guide outlines 16 practical ways to identify fictitious vendors, address billing fraud risks, and strengthen controls within your accounts payable process.

Why Fictitious Vendor Fraud Is So Difficult to Detect

Billing schemes are particularly effective because they exploit trust and familiarity. Employees involved in accounts payable may have access to vendor setup, invoice processing, and payment approvals, making it easier to conceal fraudulent activity. When internal controls break down, employees can commit fraud by creating fictitious vendors or manipulating invoices, a common form of occupational fraud.

Common risk factors include:

• Weak vendor onboarding controls
• Poor segregation of duties
• Limited transaction review
• Lack of ongoing vendor audits

Combating vendor fraud requires strong detection measures and robust controls to prevent and identify suspicious activity. Recognizing warning signs early is critical to minimizing losses.

Due Diligence and Background Checks: The First Line of Defense

Establishing robust due diligence and background check procedures is one of the most effective ways to prevent vendor fraud before it starts. By thoroughly vetting vendors during the onboarding process, companies can identify potential fraud risks and avoid engaging with fictitious or high-risk entities. This process should include verifying the vendor’s business license, tax identification number, and physical street address—not just a post office box. It’s also wise to review the vendor’s financial standing and search for any history of fraud schemes or legal issues.

Certified fraud examiners can provide valuable expertise in designing and executing these due diligence procedures, ensuring that all necessary checks are performed. By making background checks a standard part of vendor selection, organizations can protect themselves from fraudulent vendors and strengthen their defenses against vendor fraud schemes. Ultimately, diligent vetting helps companies safeguard their accounts payable process and maintain trust in their business relationships.

1. Vendors Using PO Box Mailing Addresses

Vendors that rely solely on post office box addresses may warrant additional scrutiny. While legitimate vendors may use post office box addresses, they can also obscure physical location and ownership details.

2. Vendors Not on the Approved Vendor List

Payments to unapproved or undocumented vendors bypass established controls and increase fraud risk. It is crucial to thoroughly evaluate new vendors during supplier onboarding, using verification processes and due diligence to prevent fictitious vendor schemes. All vendors should undergo formal approval before payment.

3. Invoices With Even Dollar Amounts or Missing Taxes

Invoices with round dollar amounts or no applicable taxes can indicate fabricated billing, such as inflated invoices—a common tactic where vendors or employees manipulate billing to increase costs—rather than legitimate commercial transactions.

4. Vague or Unnecessary Services

Invoices that describe services in broad or ambiguous terms—without clear deliverables—are common indicators of fictitious vendors. These vendors may submit bills for services that are not clearly defined, making it easier to conceal fraudulent or unnecessary charges.

5. Payments Without Supporting Documentation

A legitimate vendor provides contracts, purchase orders, or detailed invoices, ensuring transparency and authenticity in supplier relationships. Missing documentation should be treated as a red flag.

6. Overlapping Vendor and Employee Information

Comparing vendor names, addresses, bank account details, and phone numbers against employee records can uncover hidden connections.

7. Vendors Linked to Employee Benefit Records

Vendors that appear as health or life insurance beneficiaries of employees present a serious conflict-of-interest risk.

8. Invoices Created Using Basic Templates

Invoices generated using simple Word or Excel templates—rather than professional accounting systems—may signal fraudulent activity.

9. Vendors With Unusually High Revenue

Vendors generating above-average revenue compared to peers may deserve closer review to confirm legitimacy, as higher prices or inflated contract costs can be a red flag for potential vendor fraud. In some cases, fraudsters may use multiple companies to conceal unusually high revenue patterns and make fraudulent activity harder to detect.

10. Consecutive Invoice Numbers

Legitimate vendors typically issue invoices to many customers. Sequential invoice numbers can indicate a vendor billing only one organization.

11. Similar or Slightly Altered Vendor Names

Fraudsters may create vendors with names similar to legitimate suppliers to divert payments unnoticed.

12. Employees Listed in Secretary of State Records

Checking AP employee names against corporate registration records may reveal ownership or control of vendor entities.

13. Missing or Invalid Taxpayer Identification Numbers

Vendors without valid taxpayer IDs—or with incorrectly formatted numbers—should be investigated immediately.

14. Duplicate Identification Numbers Across Vendors

Multiple vendors sharing the same EIN, TIN, or DUNS number strongly indicate fictitious or duplicate entities.

15. Sudden Changes in Pricing or Services

Drastic, unexplained changes in pricing, services, or products may indicate manipulation or fabricated billing.

16. Vendor Names Consisting Only of Initials

Vendor names made up solely of initials—especially when they match employee initials—are a recognized fraud indicator.

Employee Tips and Education on Fake Invoices

Empowering employees with the knowledge to spot and report vendor fraud is a critical layer of defense. Regular training sessions should cover the most common types of vendor fraud schemes, such as phantom vendors, duplicate invoice payments, and check tampering. Employees should learn to recognize warning signs like fake invoices with inflated prices, duplicate invoices, or missing details that could indicate fraudulent activity.

Encouraging employees to share tips and observations about suspicious vendors or payments can help companies identify vendor fraud early. Establishing clear reporting channels and fostering a culture of vigilance ensures that red flags are escalated promptly. By investing in employee education and reinforcing strong internal controls, organizations can prevent vendor fraud, protect their accounts payable system, and reduce the risk of financial losses due to fraud schemes.

Accounts Payable Process and Check Tampering

The accounts payable process is a frequent target for vendor fraud, especially through check tampering. This type of fraud occurs when an employee manipulates checks—such as altering payee information or redirecting payments to a personal account or a fictitious vendor—to divert funds for personal gain. To combat this, companies must implement strong segregation of duties, ensuring that no single employee is responsible for invoice approval, payment processing, and bank reconciliation, and consider leveraging case management processes enhanced by AI tools to improve fraud detection and resolution.

Regular audits and reconciliations are essential to detect unauthorized payments or duplicate payments that may signal fraudulent activity. Financial controls, such as approval thresholds and dual sign-offs, further reduce the risk of check tampering. By securing the accounts payable process with appropriate segregation and oversight, organizations can protect themselves from vendor fraud, maintain the integrity of their accounts, and ensure that payments are only made to legitimate vendors.

Strengthening Controls Beyond Detection

In addition to identifying red flags, organizations should:

• Segregate vendor setup, invoice approval, and payment functions
• Enforce mandatory vacations
• Perform periodic reviews of vendor additions and changes, including verifying the accuracy of a vendor's business information such as bank details, addresses, and tax IDs
• Monitor payment patterns using AI-powered analytics to detect anomalies or unusual activities
• Require independent review of vendor master file updates
• Be alert to monetary compensation or inducements that may influence vendor selection or contract awards

These controls significantly reduce the opportunity for fictitious vendor schemes.

How Case IQ Helps Detect and Investigate Fictitious Vendors

Identifying fictitious vendors requires visibility, documentation, and structured investigation processes. Case IQ’s case management platform helps organizations detect, investigate, and respond to AP fraud more effectively.

With Case IQ, organizations can:

• Centralize vendor-related allegations and findings: Capture concerns, audit results, and investigation notes in a single system.
• Track investigations from intake to resolution: Maintain clear timelines, ownership, and documented outcomes.
• Analyze patterns and repeat risks: Identify recurring vendor or employee red flags across cases.
• Support audits and compliance reviews: Preserve evidence and investigation records for internal or external review.
• Improve fraud prevention efforts: Use insights from investigations to strengthen controls and policies.

Case IQ supports a proactive, defensible approach to fraud risk management and also offers resources to help organizations address, investigate, and prevent workplace fraud.

Frequently Asked Questions About Fictitious Vendors

What is a fictitious vendor?

A fictitious vendor is a fake company created to receive fraudulent payments for goods or services that were never provided.

Why are fictitious vendor schemes common in accounts payable?

AP processes often involve high transaction volume, trusted access, and limited oversight, making them attractive targets for fraud.

What are the most common red flags of fictitious vendors?

Red flags include PO box addresses, vague invoices, missing tax IDs, overlapping employee information, and duplicate identification numbers.

How often should vendor files be reviewed?

Vendor files should be reviewed periodically and whenever vendors are added or modified.

Can technology help detect fictitious vendors?

Yes. Centralized systems and analytics help identify patterns, inconsistencies, and repeat risks across vendor data.