Facing supply chain fraud can be quite a brutal process but it’s an aspect that still manages to be overlooked by many companies. Avnet Inc.’s vice president, Wade McDaniel, has warned against this and provides insight and recommendations to help companies address supply chain fraud. Here are a few practices by McDaniel that can be put in place to help recognize and avoid fraud:
Admit you may have a problemA lot of executives don’t want to believe and accept that their employees and colleagues have the potential to act unethically. It’s something that is often avoided. However, according to Deloitte Advisory’s 2016 Fraud Risk Assessment poll, employees are the biggest source of supply chain fraud risk, followed by vendors and other third parties. With this coming to light, executives need to face this head-on no matter how sensitive it gets and pinpoint it before it becomes a dire consequence to deal with.
Avoid jumping to conclusionsKeep in mind that mistakes happen, errors take place and so it’s very crucial to ask questions and clarify with your staff or anyone involved before making accusations. If your analytics process shows duplicate invoices, there could be a number of reasons as to why that has happened. Be sure of those reasons before taking action.
Be aware of internal fraudMany professionals tend to neglect looking at profit leakage from internal fraud and the financial, brand and reputational risk related to their supplier associations. This happens because they get too focused on operational efficiencies to notice anything but the fraud that takes place internally. Therefore it’s important to be aware at all times.
Know your partnersRelying on supply chain partners can leave your company in a vulnerable state. So make certain that you take time to thoroughly research new suppliers and include factors such as visual relationship mapping, background checks and business intelligence reviews to reveal potential conflict of interest, indicators of financial distress or other misrepresentations.
Conduct regular evaluationsApproval after conducting the research mentioned above should not be the final assessment you ever do concerning your supplier. Roles change within the supply chain and cause players involved to evolve too. Employees get hired and fired; suppliers get bought and sold. These events then need regular re-evaluations as relationships can be at risk due to these changes.
Perform risk assessmentCompanies need to include the supply chain fraud element as part of their broader supply chain risk strategy from the beginning. A lot of organizations are doing some form of enterprise and supply chain risk assessment and including the fraud piece would be the next logical step.
Put data to useBusinesses that proactively engage with and analyse supply chain fraud use analytics as part of their ongoing invoicing process. Use data recorded by your company’s resource planning systems to conduct fraud tests and also take a look at other analytics that can help point out irregular and erroneous billing.
Tap into unstructured data sourcesCompanies that are successful combine data mining and forensic accounting to move beyond analysis of common transactional accounts payable. Fraud indicators can be revealed via unstructured data sources such emails, contracts and invoices.
Have sourcing visibilityFraud isn’t always tied to financial factors. High-tech supply chains, for example, cannot underestimate the ongoing threat of counterfeit components. Visibility then is important in that it provides assurance concerning the origin of the products you are sourcing.
Stay alertAccording to Donald Cressey’s fraud triangle model, the three contributing factors that are present in every circumstance of occupational fraud are:
- Motive/Pressure – Perceived financial need
- Opportunity – Weak internal controls or lack of oversight
- Rationalization – Self-justification for committing fraud