Accounting & Finance
Why Vendor Background Screening is Important – And How to Do it
Whenever you bring a new employee into your organization, the last step in the hiring process is typically a background check. Depending on your business, you may be looking for evidence of past wrongdoing, or simply confirming that the information that’s been provided is accurate.
But do you go through that same process for your vendors?
Do you look into the information they’ve provided and evaluate their past performance and history before you award them a contract?
Or do you simply take their word for it, and assume that the relationship will be productive?
If you fall into the latter category, you may be putting your business at risk for fraud and significant losses. In fact, the Association of Certified Fraud Examiners notes that small businesses (those with fewer than 100 employees) lose more on average to fraud than larger companies. This is likely in large part due to the robust vendor risk management protocols within large companies, which include thorough background screening of third party vendors.
However, it’s becoming increasingly important for even smaller enterprises to put more resources toward evaluating the risk of their vendor relationships and contracts, and do the same work to protect their assets.
Reasons You Need Background Checks on Vendors
Imagine you arrive at a weekly staff meeting, and one of your team leaders is excited. He’s met with a new vendor who promises to cut supply costs in half while still maintaining quality. In fact, they beat your current suppliers on nearly every front. The catch? You have to spend a minimum of $5,000 each month. Your team leader tells you he signed the contract, effective immediately.
It doesn’t take long before problems start, though. Shipments are delayed or never arrive. Quality is shoddy. The prices are higher than quoted, and you’re losing money every month trying to maintain the vendor. After a few months, you start asking questions, and it becomes clear that the vendor is not all it claimed to be.
This entire situation could have been avoided by implementing a vendor review policy that included a background check and multiple layers of approval for new vendors. Without it, you leave yourself vulnerable to contracts with vendors who at best may be unreliable — and at worst, fraudulent.
With that in mind, there are many good reasons to check the background of any business you plan to work with. These include:
- Avoiding criminal association. A vendor with a history of criminal activity is not ideal for your company on several fronts
- Compliance with industry or legal regulations. Depending on your business, and what access the vendor will have to information, you may be required by law to look into the history of any vendors
- Reduce legal liability. Knowing who you are working with and their reputation can save you a lot of headaches, and reduce or eliminate your liability should something go wrong
- Compliance with employment laws. Working with vendors who are not legally allowed to work can create major legal headaches for you. Confirming that they are allowed to work (including residency and license checks) keeps you in the clear
At their heart, vendor background checks give you insight into who you are working with and what to expect. Even public information like customer reviews and Better Business Bureau reports can give you a sense of the quality of their services, how they deal with problems, and how others feel about them. You reduce your risk — and increase your chances of a productive, fruitful relationship.
How to Conduct Vendor Background Checks
In many cases, you can find the information you need to make an informed decision is easily accessible. At a minimum, you should be able to answer the following questions about any vendor:
- Are they licensed and insured?
- Does the business have any pending legal issues?
- Does anyone in the business have a relevant criminal history?
- Who works for the vendor?
- What is the vendor’s reputation in the industry?
- Does all the information provided by the vendor match up?
- Has the vendor been subject to any regulatory or government sanctions?
- Does the social media profile match the information provided?
There are multiple tools you can use to uncover this information. Although you may be able to find much of the information yourself, you can save time by working with a professional background screening service. The benefit of this approach is that a professional organization can provide insight and guidance based on industry regulations and best practices.
Implementing a vendor risk management program that uses artificial intelligence and machine learning to objectively evaluate risk and assign a risk score can also provide insights and allow you to make better contracting and purchasing decisions. Using these tools can protect your business from fraud and support better contracting, making them a valuable tool for an efficient and profitable business.