Refresher Course: Five Best Practices to Root Out Supply Chain Fraud

The Association of Certified Fraud Examiners (ACFE) estimates that a typical organization loses 5% of revenue a year because of fraud. Yet, more than 44% of company fraud cases are discovered only through a tip or by accident.

So, finance professionals need to understand what supply chain fraud is, where it is happening, and what can be done about it.

“It could be the case that if things look too good to be true, then maybe they are too good”

“Supply chain fraud can mean a lot of different things to a lot of different organizations,” said Vito Giovingo, CPA, CGMA, formerly a risk advisory consultant, and now director of enterprise risk management at McDonald’s Corporation. “It can cover everything from the purchase of raw materials, to delivery and logistics, and also marketing activities,” he said.

Giovingo, who along with Katie Hausfeld, J.D., a senior litigation associate at global law firm DLA Piper, gave a presentation on supply chain fraud at the 2017 AICPA Global Manufacturing Conference, said it “runs the gamut” of frauds, from false expenses claims from employees, to high-level corruption involving government officials and partners.

Know who to trust

Because fraud can happen anywhere in the supply chain, it can be difficult to know who to trust.

“Where I’ve seen a lot of my clients get heartburn — in terms of reducing or mitigating risk of fraud in their supply chain — is really knowing your suppliers and knowing the individuals within your supply chain,” Hausfeld said.

“Due diligence is key both from the time you bring in a party into the supply chain all the way through the relationship and constantly refreshing the due diligence,” she added.

So, is it a case of trust nobody?

“No,” Giovingo said. “It is a case of not trusting blindly, but you also don’t want to presume everyone is a bad actor.”

Assess risk

With some organizations having hundreds or even thousands of partners in their supply chain, it may not be possible to do checks on everybody in the supply chain, but Giovingo and Hausfeld believe you don’t have to.

“It isn’t possible or practical to bring risk down to zero, but if you understand your supply chain and what people do for you, you can start to focus on who is more important to your organization and poses the biggest risk,” Giovingo said.

“It’s looking at your total pool of third-party relationships and doing a risk assessment of those relationships, determining which are higher or lower risk based on the type of work that they provide, the service they provide, the spend, their location, and then implementing the appropriate due diligence for that level of risk,” Hausfeld explained.

Follow the money

As any detective in a TV cop show might say, if you want to find the perpetrator of a crime, you should follow the money, and when it comes to supply chain fraud, this turns out to be sage advice.

With more than 80% of fraud cases surveyed by the ACFE featuring asset misappropriation, keeping an eye on where money changes hands is the perfect place to start.

“Of course, fraud can occur where money changes hands,” Hausfeld said.

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