While many of the headline-grabbing fraud stories come from the financial services sector, fraud in the manufacturing sector is more common than many would think. Andrew Durant, senior managing director at FTI Consulting uncovers the sector’s underhand dealings.
A study published by the Fraud Advisory Panel in 2010, found that overall, large enterprises lost £5.4 billion to fraud. The consumer goods and manufacturing industries suffered the greatest losses (£1.3 billion and £1 billion respectively).
This is borne out by my personal experience of investigation fraud over the past 20 years. One of the most memorable cases I have worked on had a huge impact for both the company and local community.
“As with so many instances of fraud, the perpetrator was an employee of the company, and a senior one at that.”
The actions of a finance director in a vehicle manufacturer effectively brought down the company – the parent company closed the operations resulting in around 1,200 redundancies. This also had a knock-on effect with the company’s supply chain leading to further job losses. And as the largest employers in the town, this has a severe effect on the local economy with many families hit by the losses two incomes at once.
“As the UK Government’s spending cuts really start to hit families in the next year and the threat of redundancies loom large, the temptation to top up income through fraud will be a strong one.”
As with so many instances of fraud, the perpetrator was an employee of the company, and a senior one at that. Companies are at far more risk from their own employees than anyone else and the threat of fraud rises steeply when two or more employees collude.
Fraudsters are not always in it just for the money, but it can be a strong motivation. As the UK Government’s spending cuts really start to hit families in the next year and the threat of redundancies loom large, the temptation to top up income through fraud will be a strong one.
What makes a fraudster?
It is difficult to generalise, but studies have suggested that perpetrators tend to be University-educated white males, with men accounting for nearly three quarters of all offences.
While employees of any level could commit fraud, the impact is likely to higher the more senior the offender. Losses caused by managers were four times, and executives 16 times, more than those of employees lower down the food chain.
And finally, length of service plays a factor. Nearly half of fraudsters have been employed by their companies for five or more years.
How can manufacturers reduce risk of employee fraud?
As part of overall risk control procedures, companies need to look at the following:
1. Recruitment screening
Ensuring proper screening is put in place for all full-time, temporary and contract staff can reduce risk. The level of screening will be dependent on seniority and/or position. There will also need to be on-going screening for existing staff.
2. Code of conduct
Fraud is more likely to take place in an organisation which tolerates unethical behaviour. A code of conduct, which sets the tone from the top, is properly enforced and updated according to changing circumstances, will not only help to keep employees on the ‘straight and narrow’ but may encourage people to come forward if they know that fraud is being committed.
It is very rare for fraud to be committed in the workplace and for other (innocent) employees not to know about it. Even if an organisation has a whistle-blowing process, staff and suppliers need to be aware. The fact that there may have been a low number of reports may indicate a lack of trust in the process rather than a low incidence of fraud. If a whistle-blower does come forward, the organisation will need to ensure it has adequate procedures in place to ensure all the relevant information is obtained and so it can react appropriately.
4. Risk assessment & controls
Once the organisation has dealt with some of the human aspects to fraud prevention (i.e. it has the right staff with the right attitude), it can then move onto performing a risk assessment. When risks have been identified, prioritised and allocated, controls can then be assessed. This includes identification of existing controls, testing of those controls, updating or designing of new controls, monitoring performance of controls going forward and further updating if necessary.
But even with these processes in place, companies should not forget to look out for signs right under their nose. Often fraud can be detected just through managers noticing a change in behaviour such as increased levels of stress, reluctance to take holiday or delegate and a tendency to take on responsibility for projects outside of their remit. Employees who suddenly have a lifestyle not commensurate with salary can also be a warning sign.
While the vast majority of employees are honest, it still pays to be vigilant for the signs of fraud that can seriously impact a company’s balance sheet in an already difficult economic market.