Employees Top Sources of Supply Chain Fraud Risk

Fraud

In the context of the supply chain, the term “fraud” could mean many things: intentional financial errors; misrepresented inventory levels or outright fake products. More than one quarter (28.9 percent) of supply chain professionals polled by Deloitte Financial Advisory Services said their organizations experienced supply chain fraud, waste or abuse during the past 12 months. Nearly as many (26.8 percent) have no program currently in place to prevent and detect those risks, according to the 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, in a release. “With reputational, litigation and regulatory repercussions hanging in the balance, companies can’t afford to dismiss supply chain fraud prevention and detection. Schemes constantly evolve and come from every direction, making vigilance crucial.”

In the electronics industry, key compliance concerns include environmental (such as RoHS and WEEE); import/export restrictions (certain countries are prohibited from receiving specific high-tech items); and the more general problem of counterfeit goods. Somewhat surprisingly, respondents to the Deloitte poll said employees (22.9 percent) were the top identified source of supply chain fraud risk, when compared to vendors (17.4 percent), and other third parties (20.1 percent), 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,” added 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.”

In a high-profile lawsuit involving the tech industry, employees of electronics manufacturing services provider Flextronics are alleged to have sold Xilinx parts destined for one customer to another customer at a higher price. Xilinx parts were also remarked and misrepresented, the suit alleges, and some of those products could have been sold to countries that are prohibited from receiving them.

The introduction of counterfeits into the supply chain is also a major concern in electronics. Commercial or even damaged items are often remarked and sold as military-specification goods, for example. Several high-profile counterfeiters have been caught and prosecuted by the U.S. Department of Justice.

Deloitte provides the following warning signs for supply chain fraud, waste and abuse:

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 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.

“Don’t fall into the ‘it can’t happen at my company’ trap," Pearson continued. "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 is quite difficult.”

Electronics component suppliers and authorized distributors go to great pains to track their products from factory to end-customer to guarantee their authenticity. Many electronics companies also participate in voluntary security programs such as C-TPAT, or the Customs-Trade Partnership Against Terrorism. C-TPAT involves a series of voluntary steps to help protect shipments against some forms of terrorism. Conformance can help move shipments across borders more quickly. “We do carry C-TPAT in the U.S. and AEO in Europe,” said Tim Kolbus, vice president of global logistics solutions for Arrow Electronics Inc.

“Vendors and other third parties have become accustomed to filling out surveys and engaging in discussions about their practices within supply chains," Kivett added. "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 two-thirds (65.3 percent) of respondents to the Deloitte poll reported their company conducts at least some due diligence on their third parties. Nearly half as many (29 percent) evaluate the supply chain fraud risks that third parties present on an annual or more frequent basis.

More than 2,060 professionals from sectors including banking and securities; technology; retail and distribution; process and industrial products; and consumer products were polled by Deloitte.

Sponsored Content