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Tips to Combat Fraud in the Manufacturing Industry

You can hardly tune into a media outlet without seeing headlines predicting an economic recession in 2023. In 2009, the Association of Certified Fraud Examiners released a study on the impact of an economic crisis and its relationship with increased fraud, noting that more than half of their respondents saw an increase in the number of fraud incidents. Let’s look at the infamous fraud triangle in today’s environment, and what you might be able to do to mitigate fraud in your company.

The Fraud Triangle

Pressure – Motivation or Incentive to Commit Fraud

After more than 2 years following the COVID-19 pandemic, many thought the US economy would have returned to normal by now. Instead, retirement accounts are plummeting, the average trip to the grocery store seems to be rising weekly, and the cost to finance purchases keeps climbing. Some employees may be seeing their bank accounts dwindle, providing the incentive that may be needed to commit fraud.

Opportunity – Knowledge and ability to carry out fraud

Despite Pennsylvania experiencing some of its lowest unemployment rates since 2010, many employers are still scraping to find talent to add to their teams. This labor shortage can give rise to holes in an otherwise well-designed internal control environment.

Rationalization – Justification of dishonest actions

As essential workers, manufacturing employees have carried on through the last 2+ years, many working long hours to meet demand when staffing is inadequate. Employees may feel their pay does not adequately compensate for the long hours or the rising inflation or may not feel appreciated for the efforts and dedication to the company. Employees could rationalize by convincing themselves they will pay it back once the economy rebounds.

This year the ACFE released a report on occupational Fraud, noting that Manufacturing was one of the top three industries affected. The most common forms of Fraud for the industry were corruption, billing, and noncash schemes.

What Can Be Done?

The report notes that the primary weaknesses that contributed to the fraud were lack of controls and override of existing controls, making up almost 50% of the instances of Fraud. Now is the time to evaluate your internal controls and identify where there are opportunities to make improvements, including:

  • Segregation of Duties – Design financial reporting processes to include more than one person. If you have vacant positions, identify the most significant aspects of that vacant position’s responsibilities and shift those roles to another position until you can fill the gap.
  • Communicate – Review the employee manual or other communications to verify clear expectations of appropriate behavior in the workplace and highlight the method by which employees can report any fraudulent or unethical behavior they observe (ie. Fraud hotline). Employee tips are the most common way fraud is caught!
  • Inventory controls – Your inventory is one of the easiest noncash areas for Fraud. Perform regular cycle counts and investigate unusual variances timely. Keeping your warehouse organized can be a simple yet effective measure. For more robust monitoring, consider video surveillance or implementing bar code scanning, for more higher dollar inventory items.

We will continue to monitor the challenges and opportunities that emerge over the coming months and discuss the industry’s responses in future posts. For more information regarding our manufacturing experience, be sure to visit our Manufacturing Services page and don’t hesitate to reach out to a member of our manufacturing team.

About the Author

Shalane Cohen

Shalane is a Principal at McKonly & Asbury. With over 15 years of experience, she is a leader in the firm’s external Audit and Assurance Segment serving middle-market, closely held businesses. She assists her clients with financial s… Read more

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