Occupational fraud, or employee fraud, is a serious issue for all firms. According to the Association of Certified Fraud Examiners (ACFE), firms lose 5% of their revenue to fraud each year, with manufacturing being one of the most affected industries.
The ACFE investigated 2,110 fraud instances in 133 countries for its most recent study, Occupational Fraud 2022: A Report to the Nations®. The median loss in each case was $117,000. Notably, manufacturers were implicated in 194 cases, with a median loss of $177,000—significantly more than the overall median loss. (The ACFE will issue its next Report to the Nations later this year.)
3 Common Schemes
The ACFE recognized three common types of occupational fraud:
- Asset misappropriation accounts for 86% of all cases. This happens when an employee steals or mishandles the employer’s resources. Examples include invoicing schemes, inventory theft, and payroll fraud.
- Corruption accounts for 50% of cases. Bribery, conflicts of interest, and extortion are typical instances.
- Financial statement fraud accounts for 9% of reported incidents. In some cases, an employee knowingly causes a material misstatement or omission in the company’s financial statements.
These totals exceed 100% since many cases involve multiple types of fraud. The most typical types of fraud in the manufacturing industry are corruption, billing scams, and noncash misappropriation.
A billing scheme involves the culprit submitting invoices for phony goods or services, inflated invoices, or invoices for personal purchases hoping the employer will pay them. A perpetrator, for example, may set up a shell firm and bill the employer for services that were not actually provided.
Noncash misappropriation is the theft or misuse of an employer’s noncash assets. Examples include stealing or misusing inventory, equipment, or sensitive customer information.
Keep Control
Implementing antifraud controls is an effective way to prevent fraud. Indeed, nearly half of the cases in the ACFE’s report were caused by either a lack of internal controls or management’s overriding of existing controls. In general, the presence of antifraud controls leads to less fraud losses and faster detection.
The ACFE analyzed the effectiveness of various antifraud controls. The following controls decreased losses by 50% or more:
- Job rotation
- Required vacation
- Employee hotline
- Surprise audits
Other effective strategies include proactive data monitoring and analysis, an antifraud policy, fraud training for staff, formal fraud risk assessments, and an employee code of conduct.
To reduce the duration of fraud schemes, the most effective controls were proactive data monitoring/analysis, surprise audits, and job rotation / mandatory vacation. These measures reduced the duration of fraud schemes by 50 percent or more.
Take Precautions
Many of the most effective controls are underutilized. Even though job rotation / required vacation and surprise audits were found to reduce median fraud loss and duration by at least 50%, they are among the least-applied controls. Only 42% of the targeted firms employed surprise audits, according to the ACFE research, and only 25% had work rotation or required vacation policies in place.
The ACFE discovered that tips from employees or third parties were the detection method used in 42% of the cases noted in the report. Consistent with past ACFE studies, tips are by far the most common way to detect fraud, emphasizing the necessity of hotlines for reporting fraud and other breaches.
Fraud Could Happen to You
A variety of factors determine which controls are most effective for your manufacturing organization. It’s a good idea to benchmark your company’s antifraud controls to those of your peers. Contact us; we can help you strengthen your defenses.
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