Know the risks and warning signs

More than one-quarter of professionals (28.9%) say their organizations experienced supply chain fraud, waste, or abuse during the past 12 months, yet nearly as many (26.8%) have no program in place to prevent and detect those risks, according to a recent Deloitte Financial Advisory Services poll.

"When we ask executives overseeing supply chains why fraud risk management isn't more top of mind, we're consistently told that compliance resource constraints are to blame," said Larry Kivett, partner, Deloitte Financial Advisory Services LLP. "Schemes constantly evolve and come from every direction, making vigilance crucial."

Examples of common supply chain fraud schemes include collusion between an employee and vendor involving bribes and kickbacks, the submission of fake invoices or invoices that charge for more than what was delivered, and the delivery of counterfeit goods or goods of a lower quality than was contracted for.

Respondents to the Deloitte poll said employees were the top identified source of supply chain fraud risk (22.9%), compared to vendors (17.4%) and other third parties (20.1%), which would include subcontractors and their vendors.

"Since every supply chain's unique risk profile stems from a mix of cultures, geographies, industries, and subcontractors, developing an effective supply chain forensics program is often more art than science," says Mark Pearson, principal, Deloitte Financial Advisory Services LLP.

"But, if you know where to look, red flags and other faint signals can help you focus limited resources to drive supply chain transparency and efficiency while reducing fraud, waste, and abuse risks."

Red Flags

Warning signs of supply chain fraud can include:

  • Bidding/procurement processes that are not robust or independent
  • Lack of sufficient clarity in third-party invoice details
  • Poor or strained relationships with certain third parties
  • Infrequent or nonexistent "right-to-audit" assessments of suppliers and licensees' practices
  • Little to no oversight into proper administration of agreements with third parties
  • Use of third-party agreements that are sole-sourced without a clear explanation or are constructed as cost-plus agreements without clear definitions of cost and other relevant terms

About two-thirds (65.3%) of respondents reported their company conducts at least some due diligence on their third parties. Nearly half as many (29%) evaluate third-party supply chain fraud risks at least once a year.

"Don't fall into the 'it can't happen at my company' trap," says Pearson. "Forces outside your company aren't always to blame. Employees often leverage transactions involving vendors and third parties to their own benefit via supply chain fraud: and when collusion is involved, detection and prevention are quite difficult."

Kivett adds, "Vendors and other third parties have become accustomed to filling out surveys and engaging in discussions about their practices within supply chains. In our experience, individuals and groups who have nothing to hide work hard to clarify misunderstandings and improve relationships; those hiding illicit acts may not."

About the Poll

More than 2,060 professionals from sectors including banking and securities, technology, retail and distribution, process and industrial products, and consumer products responded to questions during a Feb. 19, 2015, webcast, titled, "Supply Chain Forensics: The Global Supply Chain Fight Against Fraud." Listen to the webcast.