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Manufacturers: Don’t turn a blind eye to occupational fraud

Occupational fraud — that is, fraud committed by employees — is a significant problem for all businesses. According to the Association of Certified Fraud Examiners (ACFE), organizations lose 5% of their revenue to fraud every year, and manufacturing is among the most frequently hit industries.

The ACFE examined 2,110 fraud cases in 133 countries in its latest report, Occupational Fraud 2022: A Report to the Nations®. The median loss per case was $117,000. Notably, manufacturers were involved in 194 cases, with a median loss of $177,000 — significantly higher than the overall median loss. (The ACFE will release its next Report to the Nations later this year.)

Know the common schemes

The ACFE identified three common categories of occupational fraud:

  1. Asset misappropriation (86% of cases). This occurs when an employee steals or misuses the employer’s resources. Examples include billing schemes, inventory theft, and payroll fraud.
  2. Corruption (50% of cases). Bribery, conflicts of interest, and extortion are common examples.
  3. Financial statement fraud (9% of cases). In these scenarios, an employee intentionally causes a material misstatement or omission in the organization’s financial statements.

These numbers total more than 100% because many cases involve more than one type of fraud. In the manufacturing industry, the most common fraud schemes are corruption, billing schemes, and noncash misappropriations.

In a billing scheme, the perpetrator causes the employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases. For example, a fraudster might create a shell company and bill the employer for services not actually rendered.

Noncash misappropriation involves stealing or misusing the employer’s noncash assets. Examples include stealing or misusing inventory, equipment, or confidential customer information.

Stay in control

Implementing antifraud controls is an effective way to combat fraud. Indeed, nearly half of the cases in the ACFE’s report were attributable to either a lack of internal controls or a management override of existing controls. Generally, the presence of antifraud controls is associated with lower fraud losses and quicker detection.

The ACFE evaluated the effectiveness of different antifraud controls. The following controls reduced losses by 50% or more:

  • Job rotation / mandatory vacation
  • An employee hotline
  • Surprise audits

Other effective measures include proactive data monitoring/analysis, an antifraud policy, fraud training for employees, formal fraud risk assessments, and an employee code of conduct.

As for shortening the duration of fraud schemes, proactive data monitoring/analysis, surprise audits, and job rotation / mandatory vacation were the most effective controls. These measures helped lower the duration of fraud schemes by 50% or more.

Use effective precautions

Some of the most effective controls are often underutilized. For example, even though job rotation / mandatory vacation and surprise audits were associated with at least 50% reductions in both median fraud loss and median fraud duration, they’re among the least commonly implemented controls. Surprise audits were used by only 42% of the victimized organizations in the ACFE’s report, while just 25% of the organizations had job rotation or mandatory vacation policies in place.

The ACFE found that tips from employees or outside parties were the detection method in 42% of the cases in the report. Consistent with previous ACFE studies, tips are by far the most common way that fraud is discovered, underscoring the importance of hotlines for reporting fraud and other violations.

It can happen to you

The most effective controls for your manufacturing company depend on a number of factors. It’s a good idea to benchmark your company’s antifraud controls against those of your peers. We can help fortify your defenses.

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