The COVID-19 pandemic has created a number of financial, operational and safety challenges which manufacturers need to address on the path to pre-pandemic profitability. Looking at 2021, many are focusing efforts on technology investments, automation integration, enhanced safety of people and products, supply chain optimization, and new employee issues. Given these challenges, it is difficult to imagine that fraud could be draining much-needed working capital from the business. Unfortunately, fraud is an ever-present threat to the company’s vitality that needs to be addressed. According to the 2020 ACFE Report to the Nations, manufacturing companies suffered a median loss of $198,000 per incident inflicted through a number of schemes. To help industry companies understand the risk, common schemes, concealment methods and most effective detection controls, McKonly & Asbury has provided a summary of the key information below.
Top Fraud Risks for Manufacturers
- Most Common Schemes – The report uncovered the most common fraud schemes perpetrated against manufacturing companies. It was found that 50% of cases reported corruption, 23% billing fraud, 22% noncash, 20% expense reimbursements, 18% financial statement fraud, 10% payroll, 8% skimming, 8% check tampering and 6% cash on hand. These details provide important information which allows for controls to specifically test and reduce/deter the use of these methods.
- Fraud Concealment – Understanding the methods used to cover crimes enables an organization to detect and prevent similar schemes more effectively. It was found that in 40% of cases fraudulent physical documents were used to conceal illegal activities, 36% altered physical documents, 27% altered electronic documents/files, 26% created fraudulent electronic documents/files. In addition, 12% of cases did not involve any attempt to conceal the fraud.
- Median Loss by Fraud Type – The report also wanted to understand which fraud schemes resulted in the highest per month loss to victim organizations. It was found that financial statement fraud had a median monthly loss of $39,800, corruption $11,100, noncash schemes $6,000, check and payment tampering $4,600, billing fraud $4,200, cash larceny $4,000, skimming $2,900 and payroll fraud $2,900.
- Length of Fraud Schemes – Given the information outlined in the prior point, it is important to understand the data in terms of the average length of various schemes. It was discovered that payroll schemes lasted 24 months, check and payment tampering 24 months, register disbursements 23 months, financial statement fraud 23 months, cash larceny 23 months, corruption 18 months, skimming 16 months, cash on hand 15 months, and noncash fraud 13 months.
- Fraud Detection Methods – The effectiveness of fraud detection methods provides important insights for manufacturers to ensure the best controls are implemented. It was found that in 43% of cases were reported by a tip, 15% internal audit, 12% management review, 5% by accident, 4% account reconciliation, 4% external audit, 3% surveillance/monitoring and 2% were notified by law enforcement. In terms of who reported fraud through tips, it was identified that 50% were reported by employees, 22% customers, 15% anonymous, 11% vendors, 2% competitors and 2% by shareholders.
Fraud is an unwelcome part of doing business which can cost hundreds of thousands of dollars before being detected. This startling loss number means manufacturing companies need to carefully consider how to design/refine fraud controls for maximum protection. If you have questions about the information outlined above, have concerns about suspected fraud or need assistance with a forensic accounting issue, McKonly & Asbury can help. For additional information, call us at (717) 761-7910 or contact David Blain, CPA, CVA at email@example.com. You can also visit our webpage to learn more about the manufacturing services our team provides.