Fraud in Manufacturing Companies

Fraud is never welcome in any business.

See also Manufacturing Accounting

Organizational fraud tactics are the direct result of dishonest and criminal behavior by a single or several employees. Most companies don’t focus heavily on fraud prevention because of the core belief that their employees are honest and would not act in such a way. Unfortunately, companies often discover this assumption is faulty after tens of thousands of dollars have been stolen. According to the 2016 Report to the Nations on Occupational Fraud and Abuse, manufacturing companies reported the third highest number of fraudulent incidents (only banking, financial services and governmental agencies reported a higher rate). The report reveals that of the companies surveyed globally, there were 118 incidents of fraud reported in the manufacturing industry with an average loss of $194,000. This evidence suggests that manufacturing companies should develop clear processes to deter fraud. To help clients, prospects and others understand how fraud is frequently perpetrated; Hanson & Co. has provided a list of the most common fraud schemes committed against manufacturing companies below.

Common Fraud Schemes

  • Corruption – According to the report, 48% of participating manufacturing companies determined that corruption was the primary cause of the fraud. This included bribery, improper gratuities and extortion, to name a few.

  • Billing Fraud – This is unfortunately a high-risk area for many companies with 32% of the reported fraud cases in the study attributed to billing fraud. This type of fraud occurs when invoices are manipulated by an accounting professional to enhance the amount owed by the company. This can include invoices for services not rendered, marked up invoices for actual services provided and invoices submitted for personal purchases made by staff. Generally, this type of fraud involves an internal accounting professional and someone at the vendor company.

  • Inventory Theft – About 30% of reported fraud cases occurred using this method. Because inventory is one the hardest assets for a company to control, it’s easy for one or many individuals to steal these items. Over time it can be more and more difficult for a company to maintain accurate inventory counts due to SKU and other record manipulation. This is a challenging risk for companies to manage because those being asked to count inventory are often in the best position to commit this type of fraud.

  • Ghost Employees – The larger an organization, the more difficult this scheme is to uncover. All it takes is one dishonest individual to create a new ghost employee and start having the company issue paychecks. This type of fraud can result in large losses because, between benefits and actual pay, a lot of resources are being stolen on a monthly basis. Unless a company regularly checks for this type of fraud it is very difficult to detect.

  • Check Tampering – Most businesses will issues checks near or on the same day during a given period. If a fraudster is able to intercept these checks, they can change the amount, alter the payee and cash the check. Unfortunately, the company may not become aware of the crime until weeks after the first check was altered.

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It’s clear that manufacturing companies need to ensure they are taking steps to prevent fraud in multiple areas of the business. This means not only implementing formal review and approval policies in the accounting department, but also establishing internal controls company-wide. These controls will help ensure the opportunity for fraud is limited as much as possible. If your company is interested in learning more about internal controls or conducting an internal audit, Hanson & Co., wants to help. For additional information, please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.