Fraud Vulnerability: Where Are Your Weaknesses

In the wake of the recent Equifax data breach, manufacturers should reassess their risk of fraud. According to the Association of Certified Fraud Examiners (ACFE), manufacturing ranks among the top three industries with the greatest number of fraud cases reported. ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse noted that the most common fraud schemes plaguing manufacturers include corruption, billing, and theft of non-cash assets.

Is your company vulnerable to these and other types of fraud? A fraud vulnerability study can illuminate where your weak spots may be. Following is a look at how a typical fraud vulnerability study might unfold.

Risk Identification 

Identifying fraud risk requires a skeptical mindset to help you see where your company might be vulnerable. It involves a good, hard look at three components of your business: the “what,” the “who” and the “how.”

First, what is at risk in your business? Cash? Equipment? Materials? Finished product? Trade secrets? It’s likely that all of these things might be worthy of theft, either outright or via an insidious fraud scheme.

Next consider who might be most likely to commit fraud. Unfortunately, occupational fraud usually involves people you trust who work in your business — a tough truth to acknowledge. The ACFE’s fraud triangle explains the three components that cause employees to commit occupational fraud: perceived financial need (pressure), perceived opportunity, and rationalization.

Finally, consider how fraudsters might commit their crimes. Corruption — the most common scheme in manufacturing — includes conflicts of interest (sales and purchasing schemes), bribery (invoice kickbacks and bid rigging), illegal gratuities, and economic extortion. Billing schemes include the creation of shell companies, collusion with vendors, and personal purchases.

Meanwhile, theft of non-cash assets can be as straightforward as employees walking off with materials or inventory. Check with your trade association to gather information about fraud schemes in your specific niche.

Risk Assessment

Given all of these unpleasant possibilities, your next step is to determine where your business is most vulnerable. For example, it’s wise to regularly assess your employees for their likelihood or motivation to commit fraud. This evaluation doesn’t have to be formal; instead, make a conscious effort to consider who might be suspect.

For example, are there employees who are clearly living above their means? Can you identify employees who never take vacation? (Many fraudsters don’t take vacation because they’re afraid their schemes will be uncovered while they’re gone.) Are you aware of any employees who are suffering financial difficulties?

Next, consider what your business is doing to deter fraud. For example, do you have physical controls on your materials, equipment and inventory? Are there strong internal controls in place in the accounting department — including segregation of duties — to deter billing, payroll or kickback schemes? Do you personally sign checks and review bank statements every month?

Risk Mitigation

Once you’ve identified your vulnerabilities, what steps can you take to deter fraud and mitigate risk? The ACFE reports that the presence of anti-fraud controls is associated with reduced fraud losses and shorter fraud duration. Anti-fraud controls can range from the simple, like locks on doors, to more complicated financial controls. Figuring out what your company needs will depend on your specific circumstances.

Perhaps the most important fraud deterrent is an attitude of zero-tolerance, which starts at the top. Employees look to the company’s owner for guidance and modeling of appropriate behavior. If you are disciplined and careful with company assets, it’s likely that your employees will be, too.

We can help assess any fraud vulnerability you may have within your organization.

About the Authors

John E. Jenkins
John E. Jenkins
Partner, Taxation Services


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