CFE Question of the Day: Third-Party Due Diligence

Quiz Yazan Ibrahim
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CFE exam practice question — CFE Question of the Day: Third-Party Due Diligence

CFE exam practice question: daily practice for the Certified Fraud Examiner (CFE) exam — domain: Fraud Prevention and Deterrence.

Question

A procurement team at a mid-size manufacturer onboards a new maintenance contractor after receiving a competitive quote. Six months later, internal audit finds the contractor’s invoices are consistently higher than market rates and the contractor is owned by a relative of a purchasing staff member. Which control would most effectively reduce the likelihood of this type of vendor-related fraud during onboarding?

  • A. Require at least three vendor references from unrelated clients before approval
  • B. Implement formal third-party due diligence that verifies beneficial ownership, conducts background and sanctions checks, and includes site or identity verification before onboarding
  • C. Rely on electronic invoicing with mandatory invoice numbering and automated three-way matching before payment
  • D. Conduct annual vendor performance reviews led by the procurement manager to identify pricing anomalies
Show the answer and explanation

Correct answer: B. Implement formal third-party due diligence that verifies beneficial ownership, conducts background and sanctions checks, and includes site or identity verification before onboarding

The best control is implementing formal third-party due diligence that verifies beneficial ownership and performs background checks and site or identity verification prior to onboarding. This directly detects related-party ownership and elevated fraud risk before the vendor is approved. Requiring references (option A) can help but references may be falsified or biased and do not reveal ownership. Electronic invoicing and three-way matching (option C) help detect invoice discrepancies after onboarding but do not identify hidden ownership or conflicts of interest. Annual performance reviews led by procurement (option D) are after-the-fact and may lack independence to detect collusion or nepotism during onboarding.

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