Supply Chain Fraud and Detection Still Not Up to Par

More than one-quarter of professionals (28.9 percent) say their organizations experienced supply chain fraud, waste or abuse during the past 12 months, yet nearly as many (26.8 percent) have no program currently in place to prevent and detect those risks, according to a recent Deloitte Financial Advisory Services 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,” says Larry Kivett, partner, Deloitte Financial Advisory Services LLP. “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.”

Somewhat surprisingly, respondents 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,” adds 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.”

Warning signs for supply chain fraud, waste and abuse can include:
• 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.

About two-thirds (65.3 percent) of respondents 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.

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