I somewhat expected the results of a survey to show slightly more than one-quarter of professionals said their organizations experienced supply chain fraud, waste or abuse during the past 12 months. I was surprised, however, to also see that 26 percent of the respondents said their companies have no program in place to prevent and detect those risks, according to a report from Deloitte Financial Advisory Services about a poll conducted earlier this year.
“When we ask executives overseeing supply chains why fraud risk management isn’t more top of mind, they consistently say compliance resource constraints are to blame,” says Larry Kivett, partner, Deloitte Financial Advisory Services LLP. “With reputational, litigation and regulatory repercussions hanging in the balance, companies can’t afford to dismiss supply chain fraud prevention and detection. Schemes constantly evolve and come from every direction, making vigilance crucial.”
Financial fraud may take many shapes. For instance, employees may forge entries on expense accounts or other allocated charges, or a vendor may falsify labor charges. At the other end of the spectrum, there may be collusion between a company employee—usually in a procurement role—and an outside party. In some cases, the buyer may receive kickbacks or other financial incentives in exchange for using the vendor’s services.
Indeed, 22 percent of the respondents to the Deloitte survey said employees were the top identified source of supply chain fraud risk. Vendors and other third parties, which would include subcontractors and their vendors, were also frequently cited by the survey respondents as top supply chain fraud risks.
“Don’t fall into the ‘it can’t happen at my company’ trap,” says Mark Pearson, principal, Deloitte Financial Advisory Services. “Forces outside your company aren’t always to blame. Employees often leverage transactions involving vendors and third parties to their own benefit via supply chain fraud. When collusion is involved, detection and prevention is quite difficult.”
The good news is that almost two-thirds of the respondents reported their company conducts at least some due diligence on their third parties. Furthermore, nearly a third of the respondents say their company evaluates supply chain fraud risks that third parties present on an annual or more frequent basis.
When checking for supply chain fraud, waste and abuse, there are several warning signs to look for, according to Deloitte. They may include:
•Bidding/procurement processes which aren’t robust or independent;
•Lack of sufficient clarity in third-party invoice details;
•Poor or strained relationships with certain third parties;
•Infrequent or non-existent “right-to-audit” assessments of suppliers and licensees’ practices;
•Little-to-no oversight into proper administration of agreements with third parties; and,
•Use of third-party agreements that are sole-sourced without a clear explanation or are constructed as cost-plus agreements without clear definitions of cost and other relevant terms.
“Since every supply chain’s unique risk profile stems from a mix of cultures, geographies, industries and subcontractors, developing an effective supply chain forensics program is often more art than science,” says Pearson. “But, if you know where to look, red flags and other faint signals can help you focus limited resources to drive supply chain transparency and efficiency while reducing fraud, waste and abuse risks.”
What are your thoughts on supply chain fraud? Does your company have a fraud risk management program in place?