Manufacturing and Distribution Group Newsletter – Fall 2014
Brandon W. Vahl, Mark A. Thomson
Look Who Tops the 2014 Fraud List
BRANDON VAHL, CPA, CFE
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 is significantly higher than the median loss of $145,000 among all fraud cases.
A lingering question is: Are manufacturers 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:
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. Do you have an approved vendor list that is consistently reviewed and updated?
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. How often do you communicate the importance of ethical business practices to your employees?
Manufacturers rely heavily on tangible assets, such as inventory and fixed assets. So, it is little surprise that thieves took more than just cash in 34.5% of the cases involving manufacturers. Smaller finished goods and tools may be easily pocketed by line workers and then sold on the Internet. How strong are your controls over inventory and shop tools?
Often there is overlap between fraud schemes perpetrated in a case. In other words, a manufacturer that is victimized by a billing scheme might also report corruption or check tampering. Fraudsters typically start small and become more aggressive as time passes.
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.
Small manufacturers sometimes believe that it is 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. And the financial investment far outweighs the benefit. Companies that proactively monitor and analyze data — the most effective measure at reducing losses — are likely to reduce fraud losses by nearly 60% as reported by the ACFE.
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 and consult with legal counsel. For additional questions, contact Brandon Vahl at [email protected] or call him at 312.670.7444. Visit orba.com for more information on our Manufacturing and Distribution Group.
Reshoring – A Growing Phenomenon?
MARK THOMSON, CPA
As manufacturing continues to make a comeback in the U.S., more and more companies are rethinking why they continue to have a portion, or all, of their manufacturing overseas. As business continues to evolve into a customer-driven, produce-on-demand product offering with many options, these companies are looking to reduce their investment in inventory and still meet the growing need for customization. A solution that is gaining in popularity these days is to find a local, or at least U.S.-based, vendor/supplier that can support their needs.
A not-for-profit group, Reshoring Initiative, was established to help provide support, including case studies and a total cost calculator (TCO), for companies debating between bringing production back to the U.S. or leaving it overseas. The TCO tool is especially useful as it allows each company to understand the total cost of having their product manufactured and shipped from overseas.
As manufacturers and distributors today are realizing that with overseas price increases, continued quality issues and a lack of intellectual property protection, they should consider taking another hard look at whether there is any real benefit to offshoring production. Using the TCO tool provides a good opportunity to understand the total cost of offshoring –and then, if applicable – finding a U.S.-based source or manufacturer.
By necessity, companies have become more efficient over the past several years and are finding more internal capacity for production, often with technology improvements, process changes or investment in equipment. Finding the right vendors and suppliers is just another key component of this process, allowing these manufacturers to bring more and more offshore production back home and further supporting the U.S. economy.
For questions, contact Mark Thomson at [email protected] or call him at 312.570.7444. Visit orba.com to learn more about our Manufacturing and Distribution Group.
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