Prevent Manufacturing Fraud in Your Commercial Business

Manufacturers in the 21st century face a range of fraud-related risks—whether internal, external, regulatory or reputational.

Addressing the problem of manufacturing fraud requires an understanding of the areas where it may occur, as well as a commitment to vigilance. If businesses incorporate these objectives into the fabric of their operations, they can position themselves to more effectively prevent and respond to fraud.

Types of fraud

The specific types of manufacturing fraud you should watch out for depend on the nature of your operations. However, you should at least be aware of fraud that is common across industries.

• Non-cash fraud: This type of fraud involves theft of valuable assets such as inventory and equipment. It can also target intellectual property, or IP, such as trade secrets and technology. IP and trade secret theft can not only cause substantial damage to the sales and revenue but also threaten customers' loyalty and the manufacturer's reputation.
• Corruption: Bribery, illegal gratuities and economic extortion can affect companies of all sizes and in any industry. You may want to keep an eye on contract terms and approval procedures, as well as relationships with suppliers. Pay attention to unusual volume increases in purchases or returns for customers and suppliers at month end.
• Billing scams: Pertaining mostly to inventory or sales, these scams can involve submitting invoices or purchase orders for fictitious goods and services. Invoices may also be inflated, or they may directly deal with personal purchases.

Guiding principles

No matter the manufacturing fraud risk facing your business, a few key principles and tools can go a long way toward helping you navigate risks and minimize the potential costs. A strong ethical culture and a highly effective manufacturing fraud prevention program hinges upon awareness, controls and investing in your best tools for managing fraud—your employees.

• Enact cybersecurity measures. Defenses such as firewalls, anti-virus software and intrusion detection are crucial in the fight against fraud. Implementing and regularly auditing and updating these protocols can protect against new threats and ensure your sensitive data is safe.
• Educate employees. Take measures to ensure all staff are fully trained to recognize phishing attempts and social engineering tactics. Regular training sessions and simulations can empower your employees to become your first line of defense.
• Strengthen internal controls. Strict access controls and segregation of duties minimizes internal fraud risks by limiting opportunities. If no one individual has complete access to financial transactions or sensitive information, it becomes much more difficult for them to commit fraud. Automated tools can also help monitor unusual activities and provide early warnings of fraudulent actions.
• Monitor and audit financial transactions. Real-time monitoring allows companies to instantly detect and respond to suspicious activities, minimizing financial loss. Regular audits can help you identify discrepancies and uphold a culture of accountability and transparency.
• Implement an anonymous reporting system. This could be a hotline where employees can report someone's actions that appear to violate the code of conduct. Empower employees to raise concerns without fear of retaliation. According to the Association of Certified Fraud Examiners, or ACFE, 43% of occupational frauds were detected by a tip, which is more than three times as many cases as the next common method. Tipping can mitigate the impact of fraudulent or questionable activities before costs soar or the company reputation is jeopardized.
• Create a documented plan for investigating alleged fraud. Decide who should be involved in the investigation—internally and externally—as well as their roles and responsibilities. Also, determine the level of infractions that should merit disciplinary or legal action as well as the process for beginning any of those procedures.
• Leverage data collection and analysis. Technology has never been more capable than it is today when it comes to helping you identify patterns and pinpoint outliers and other indicators of potential manufacturing fraud risk. According to Deloitte, 76% of manufacturers are adopting digital tools to gain enhanced transparency into their supply chain. Using software to collect and analyze data can help you spot irregular patterns, unusual transactions and inconsistent behaviors, enabling you to proactively safeguard your company's assets.

With a strategy that includes both the right technology and an organizational culture that promotes vigilance, your manufacturing organization can put itself in an improved position to spot fraud, limit its impact and keep your business healthy.