How to Prevent Supply Chain Fraud

Managing your supply chain is crucial to operating a successful business, but keeping track of everything that happens along the way is almost impossible. As products and materials are coming in and out, there are many opportunities along the way which can leave you vulnerable to fraud, including employee theft, counterfeit goods and dishonest vendors.

Supply Chain fraud is commonplace where the consequences can be disruptive, costly and can even affect other areas of your corporate business. For the third consecutive year, about 30 percent of Deloitte poll respondents say their companies experienced supply chain fraud, waste or abuse in 2015. Yet, just 29.3 percent of the same respondents use analytics to mitigate supply chain fraud and financial risks.

In this article we will explore how you can prevent supply chain fraud, and some of the warning signs you should look out for.

The Warning Signs

Throughout the supply chain employees and external parties such as suppliers, distributors and competitors have opportunities to commit fraud.

Here are just some of the red flags decision-making staff should be trained to identify:

  • Poor or non-existent record-keeping
  • Higher-priced, lower-quality goods
  • Excessive entertaining of procurement staff by suppliers
  • Procurement staff demanding extended periods of notice before they allow an audit to take place
  • Buyers not taking leave for extended periods
  • Lack of sufficient clarity in third-party invoice details
  • Bidding/procurement processes that are not robust or independent
  • Little-to-no oversight into proper administration of agreements with third parties

As Deloitte asserts, it is also important to look closely at data and other records, particularly:

  • “After-hours” transactions
  • Matching employee and vendor details
  • Short-term changes to employee or supplier accounts
  • Inappropriate authority to transact deals
  • Conflicts of interest
  • EFT transactions conducted without the appropriate approval

Preventative Measures

While it’s impossible to eliminate the risk of fraud entirely, you can significantly reduce the likelihood of fraudulent activity by taking a proactive and preventative approach:

1. Establish the Right Culture

While bribery is commonplace in some cultures, an organisation that condones bribes may find itself with blurred boundaries of what is and isn’t acceptable.

It’s important to implement country-specific codes of conduct and ethical policies which are practical, easy to understand and easily accessible to every employee. These policies will identify what is deemed fraudulent or unethical behaviour, ensuring that the penalty for fraud committed by employees is rigidly enforced.

2. Hire the Right People

Automated procurement and accounting systems produce information, but are still processes which are driven by people. To minimise the amount of control a single individual has over each business process, divide duties into separate actions so that no single person has the power to oversee an entire transaction.

If an employee changes divisions or moves to another area of the company, ensure their old permissions and authorities are removed- this will ensure employees do not wrongfully access information.

3. Develop a Fraud Response Plan

Unfortunately you cannot predict when a fraudulent incident will occur. As this is the case, organisations should have a robust, well communicated fraud response plan in place, to ensure they can reduce any long-lasting impact.

4. Know Who You’re Dealing With

Before arranging a business agreement with a new partner or supplier, perform background checks and integrity due diligence to ensure your manufacturers and suppliers are reputable and have no conflicts of interest. In addition, checking the financial stability of the supplies is also vital before you engage in any business activity.

Good and honest vendors won’t shy away from putting in place transparent policies to track inventory and assets and will often work hard to clarify misunderstandings and improve relationships.

5. Manage your Sub-contractors

As supply chains extend and margins are squeezed, suppliers often take to subcontracting to increase profits. If the organisation does not have visibility and control over this process, you could risk mass product recalls and poor quality production of goods.

Make sure you have full control over your sub-contractors so that you can oversee the operations.

6.Regular Quality Checks are Vital

If a supplier is based in a country such as China, and is responsible for providing finished goods to a company based outside of the country, the supplier may be able to operate with little or no supervision. This means they can take advantage of various schemes that may be contrary to the interests of the buyer, such as:

  • Production of counterfeit goods
  • Outsourcing manufacturing to third parties
  • Producing fraudulent financial statements

Regularly test your products to make sure that vendors and suppliers are maintaining the quality you need and that items are not counterfeit.

7.Develop Formal Policies

If there aren’t already a set of policies in place, develop formal policies and procedures to highlight the commitment your organisation has to prevent and control fraud and corruption.

These could include:

  • A formalised commercial anti-fraud policy including guidance material and formal business processes
  • Anti-fraud measures and their application
  • A risk management strategy with actions necessary to mitigate key risks

7.Take control of your stockroom and assets

There are no statistics on employee fraud in Australia, but when KPMG Forensic surveyed over 280 employers in 2012 it found a total loss of $372.7 million resulting from fraud. In the United States, employee theft cost retailers about US$18 billion, accounting for 43% of lost revenue, according to the latest Global Retail Theft Barometer.

Using asset tracking software and barcodes can be an effective way to reduce employee theft. Asset tracking and similar tools for inventory tracking enable you know where an item is, how it got there, and who had access to it last. Hence, making it difficult for employees to steal inventory items without being noticed.

Using barcode technology and effective policies not only enable you to monitor employees, but also save time used entering data, tracking inventory and performing forecasting.

At the end of the day, preventing supply chain fraud is a full-time commitment that never ends. Constant vigilance is required and absolute security never guaranteed. But with preventative measures enforced you can rest assured fraud will be detected when it does occur.