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Thwarting Fraud in the Supply Chain

In today’s global business environment, supply chain fraud comes in many different shapes and sizes. Counterfeiting intellectual property and money; compromising data; partaking in insider trading; fraudulently using payment or procurement cards; and misappropriating assets or funds are just a few of the crimes being committed in the global supply chain, where buyers can play an important role in reducing or completely thwarting fraud.

In many cases, supply chain fraud is an insider job. In other words, it’s not outsiders “attacking” a company and its assets; it’s an employee who is committing the crime (and, in many cases, doing the time). In Don’t Overlook Employees When Evaluating Supply Chain Fraud, Abuse,

Deloitte says employees were responsible in 23% of fraud cases, followed by vendors (17%), and other third parties (20%), including subcontractors and their vendors.

“Although it might be hard to believe that the source of supply chain fraud could come from inside a company, outside forces aren’t always to blame,” says Deloitte’s Mark Pearson. “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.”

Put a Program in Place
According to Deloitte, 29% of professionals say their organizations experienced supply chain fraud, waste, or abuse during the past 12 months, yet 27% have no program currently in place to prevent and detect those risks. It points to these signs of potential supply chain fraud, waste, or abuse that procurement professionals should be aware of:

  • Bidding and/or 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 non-existent “right-to-audit” assessments of suppliers and licensees’ practices;
  • Little-to-no oversight into proper administration of agreements with third parties; and
  • 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.

“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 can be difficult,” Pearson noted, in the report. “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.”

Assessing External Threats
Not all supply chain threats come from the inside. In fact, a good portion of them originate outside of the company’s four walls—a reality that buyers should keep in mind as they manage their procurement duties. In Seven Ways to Stronger Oversight of Supply Chain Risk, the National Association of Corporate Directors (NACD) says companies can combat supply chain fraud by striking the right balance when selecting a supplier. “Time, cost, quality, and risk are four factors a company needs to consider when identifying potential suppliers, negotiating contracts, and evaluating supplier risk and performance throughout the lifespan of the contract.”

Other good strategies include making procurement decisions with an enterprise-wide perspective; ensuring the supplier agreement spells everything out; holding suppliers to the same level of accountability; conducting periodic third-party audits; monitoring supplier risk and performance over the life of the contract; and paying attention to business continuity risk.

“There are many instances where a single-source supply strategy is the right business decision. In these cases, however, quality, time, and cost considerations often win out over business continuity risk considerations despite the risk of supply chain disruptions,” the NACD points out. “Thus, risk assessments should consider what could happen to the organization’s business model if any key component of the supply chain were taken away, even though a cause may be somewhat elusive at the time of the assessment.”

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