Security · July 17, 2020

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.


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 those that are 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.

  • Establish a code of conduct. Take measures to ensure all staff are fully trained. Consider implementing surprise inspections and external audits of records and financial statements.
  • 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. This best practice 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.
  • Consider implementing surveillance across your operations. Knowing what's happening in real time is paramount to preventing and responding to risk. Some of the most important things to monitor are plants, loading docks, delivery trucks with GPS tracking, transactions on corporate credit cards and other lines of credit.

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. Using software to collect and analyze data can help you spot duplicate invoices, out-of-sequence checks and any anomalies with payment or revenue. You may also want to keep an eye on under-the-radar transactions (too low to require additional approval).

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

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.