A surprising number of business executives are leaving their supply
chains vulnerable to financial fraud, according to a new study by
Deloitte Financial Advisory Services.
Polling more than 2,600 executives, the study found that fewer than a
third of respondents were deploying the kind of data-analytics tools
that can detect fraud or waste by vendors. Another 13% had the necessary
tools but were still learning to use them, while 22% had no data
analytics of any kind.
Many
managers, lacking sufficient knowledge of information technology, do
not understand “the power of analytics,” said Deloitte principal Mark
Pearson. As a result, they are failing to submit their invoices and
contracts to the necessary level of scrutiny.
In addition, Pearson said, many companies harbor an attitude of “it
can’t happen here.” Yet “folks who do fraud investigations every day
recognize that it exists in most organizations.”
Part of the problem lies with the nature of “big data” — the
existence of so many inputs that companies are having a tough time
sorting through the noise and deriving information of value. Pearson
said companies are doing a better job of identifying high-level trends
in invoice characteristics than they are scrutinizing individual line
items. But the latter is where most of the fraud resides.
Financial fraud among vendors and their subcontractors can take many
forms. The worst, in terms of potential dollar impact, involves
collusion between a company employee, usually in a procurement role, and
an outside party. The buyer might be getting kickbacks or other
financial incentives in exchange for using the vendor’s services.
Another possibility is an employee creating a false vendor and
submitting invoices on its behalf.
Perhaps most difficult to detect is misconduct by the vendor, often
in the form of falsified labor and inflated bills. Then there’s the
familiar pumping up of expense accounts and other kinds of allocated
charges.
At the very least, one might assume that companies are carefully
monitoring the expenses of their own employees. Often that isn’t even
the case, said Deloitte partner Larry Kivett. “In our experience,
labor-related charges, per diems and hotel, travel and expense charges
tend to be pretty problematic.”
The typical invoice can be opaque, boiling down all labor costs into a
single number. “It doesn’t contain the information a forensic
accountant would want to see,” said Pearson. “Cost-plus” contracts are
especially vulnerable to the imposition of illegitimate charges.
Fraud becomes even more of a possibility where multiple tiers of
suppliers are involved. “Everybody knows who they contract directly
with,” said Pearson. “But is that tier-one vendor actually creating the
process itself? Or is it leveraging a supply chain that might contain
entities that don’t have the client’s interest at heart?”
Kivett said there’s frequently a disconnect between the care that a
company takes in sorting through bids and contracting with the chosen
vendor, and the negligence it shows in following up to make sure that
the contract terms are being met.
“On the back end, when you get to billing, you could have very
summarized data that’s difficult to tie back to a contract,” he said.
Unfortunately, those two tasks are often performed by different
departments in “siloed” organizations.
Even up front, companies could be doing a better job of policing
their supply-chain vendors. Kivett recommended more intensive background
checks than most managers are currently conducting. “The best way to
prevent fraud,” he said, “is to eliminate your bad apples before they’ve
had access to your organization.”
It’s a piece of advice that many companies are failing to take. In
the Deloitte survey, 12%of respondents said they monitor third parties
for fraud, waste and abuse on a quarterly basis, while 13% said they do
it annually.
Pearson said procurement managers need to exercise their right to
audit vendors’ bills and activities. At the very least, companies need
to have internal auditors in place, “to help them get smart about what
it is they’re spending money on.”
As for the vendor, it’s less likely to engage in financial misconduct
with a buyer that demonstrates diligence on a constant basis, Pearson
said.
Analytics can go a long way toward smoking out the miscreants.
Kivett says available tools for parsing the numbers are more
sophisticated than ever. “There’s a proliferation of data that didn’t
exist five to 10 years ago.” What’s more, “as fraud investigators, we’ve
gotten smarter about fraud schemes.”
That assumes, of course, that companies are willing to make use of
the available tools and expertise that can help to wipe out fraud in
supply-chain relationships. But there’s some evidence that they’re
waking up.
Deloitte sees financial fraud as a “hot area,” Pearson said. ”It’s a
regular topic of conversation that we’re having now with clients.
There’s reason for optimism — a heightened awareness.”
Robert Bowman
Contributor on forbes
http://www.forbes.com/sites/robertbowman/2014/04/16/companies-are-failing-to-detect-financial-fraud-in-supply-chains-deloitte/
