One of the most fundamental internal controls in accounting is the three-way match. Before you pay a vendor invoice, you need to perform a three-way match. The three-way match is the purchase order (duly signed and approved by responsible officials), the original vendor invoice, and an independent receiving document from the shipping/receiving department confirming that the items ordered agrees with what was actually received. If the Accounts Payable department cannot perform a three-way match, the invoice does not get paid. Period.
So why doesn't the Government perform three-way matches on their purchases?
The Justice Department just announced that two men have been sentenced to 30 months in prison for defrauding the VA (Veteran's Administration) of $1 million - a fraud that could easily have been prevented had the VA performed a simple three-way match before paying its bills.
In this case, one of the two men worked for the VA and was given a credit card to buy medical supplies for the VA. His co-conspirator set up a fictitious medical supply company. The VA employee got the fictitious medical supply company company as an approved vendor for the VA and then for the next six years, created and issued fraudulent purchase orders to the fictitious company. The fictitious medical supply company created fraudulent invoices that corresponded to the fraudulent purchase orders. Then the VA employee used his Government issued credit card to pay the fraudulent invoices. The proceeds, more than $1 million consisting of 300 fraudulent invoices, were divided up and used for personal expenses.
DOJ's press release did not disclose how the fraud was uncovered. Many such cases are brought by a hotline report to the Inspector General's office or a whistleblower (or both). Obviously, the VA's internal control system was insufficient to prevent such a fraud - especially given that it occurred repeatedly over a six year period.
Although this case involved a Government agency, contractors with inadequate internal control systems, are equally susceptible to similar frauds.
You can read the full Department of Justice press release here.