Look Who Tops the 2014 Fraud List
Banking and financial services, government and public administration, and manufacturing were the top three sectors that reported fraud cases in the 2014 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE). More than 8% of the victims in the latest fraud study were manufacturers, suffering a median loss of $250,000. That’s significantly higher than the median loss of $145,000 among all fraud cases.
A lingering question is whether manufacturers are more at risk for white collar crime — or simply more proactive in reporting it?
Know Fraud Hot Spots
The ACFE study found that manufacturers are at higher-than-average risk for the following fraud schemes:
Billing.
These scams typically involve fictitious vendors or inflated invoices. A manufacturer might, for example, pay for services not actually rendered to a shell company owned by a corrupt employee — or directly pay a dishonest employee’s personal expenses. Billing schemes were perpetrated against 22.4% of the manufacturer victims in the latest study.
Corruption.Â
These cases include bribery, illegal gratuities, extortion and conflicts of interest. Collusion is common in corruption cases. For example, an employee might engage in bid rigging with a supplier in exchange for a kickback. More than half of the manufacturing fraud cases in the ACFE study involved corruption, compared to 37% of all reported cases.
Noncash theft.
Manufacturers rely heavily on tangible assets, such as inventory and fixed assets. So, it’s little surprise that thieves took more than just cash in 34.5 percent of the cases involving manufacturers. Smaller finished goods and tools may be easily pocketed by line workers and then sold on the internet.
Often there’s overlap between fraud schemes perpetrated in a case. In other words, a manufacturer that’s victimized by a billing scheme might also report corruption or check tampering.
Fight Fraud Head-On
The ACFE study reports that a strong internal control system is the most effective way to reduce fraud losses and the duration of fraud schemes. How do your preventive efforts measure up? Review this top 10 list of most effective control measures and check off the ones you currently have in place:
- Proactive data monitoring and analysis,
- Employee support programs,
- Management review,
- Written code of conduct,
- Internal audit department,
- Formal risk assessments,
- Surprise audits,
- External audit of internal controls over financial reporting,
- Fraud training for managers, and
- Fraud reporting hotline.
The ACFE study compared median losses from fraud cases based on whether the organization had particular controls in place at the time the fraud occurred. These comparisons showed that each measure on the top 10 list reduces fraud losses by at least 40 percent. Companies that proactively monitor and analyze data — the most effective measure at reducing losses — are likely to reduce fraud losses by nearly 60 percent.
Small manufacturers sometimes believe that it’s cost prohibitive to implement a formal control program. But several anti-fraud measures — such as written anti-fraud policies, formal management review procedures and anti-fraud training for managers — require minimal financial outlay.
Adopt a Zero-Tolerance Policy
Fraudsters frequently test the waters with small schemes and, if successful, move on to bolder, more costly ones. A zero-tolerance policy against any type of unethical behavior can be a powerful deterrent against these crimes.
Encourage employees and customers to report frauds, and take steps to protect whistleblowers from retaliation by co-workers. After all, tips are the most common way companies in the ACFE study first learned that they were victims of fraud.
Bring in the Experts
If you suspect fraud or would like to beef up your existing fraud controls, contact a forensic accounting specialist. He or she will know how to effectively and confidentially catch a thief — and how to build a case that will withstand legal scrutiny.
