The number of companies adopting programmes to detect and prevent global supply-chain risks is increasing, but so are fraud, waste, and abuse that companies are experiencing in their supply chains, according to Deloitte research.
A 2015 Deloitte survey of more than 2,000 professionals found that 47.2% worked for companies that were establishing or had in place programmes to prevent and detect supply-chain risks, up from 43% a year ago. About two-thirds of the respondents in the 2015 poll (65%) said their companies perform due diligence on at least some vendors and business partners – 29% of them at least once a year.
The number of respondents who said their companies experienced supply-chain fraud, waste, or abuse also rose in the past year, to 29% from 26% in 2014, according to the survey.
“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,” Larry Kivett, partner with Deloitte Financial Advisory Services, said in a statement.
Warning signs for supply-chain fraud, waste, and abuse include:
- Bidding/procurement processes that are not robust or independent.
- Details in third-party invoices are unclear.
- Poor or strained relationships with third parties.
- Infrequent or non-existent “right-to-audit” assessments of suppliers or licensees’ practices.
- Little-to-no oversight into proper administration of agreements with third parties.
- Use of third-party agreements that are sole-sourced without clear explanation, or are constructed as cost-plus agreements without clear definition of cost or other relevant terms.
To better manage global supply-chain risks and address any warning signs of fraud, abuse, and waste, Deloitte suggested companies take these four steps:
Know your supplier to identify and prioritise risk. Gather information internally and externally to identify potential risks involving suppliers and business partners, including what relationships to government entities they have, how they are compensated, what the scope of the relationship is, and what compliance programmes they have. Run a background check on suppliers to detect potential risk indicators.
Use the information gathered to make a list of supply-chain risks the company is exposed to worldwide, such as corrupt governmental officials, employees that fail to follow safety procedures, and product malfunctions. Score and rank the risks by severity, likelihood of occurrence, and ease of detection to come up with a short list of high-priority risks.
Map the volume of products flowing around the world. Use mapping software to visualise product flows as lines whose thickness represent corresponding volumes. This type of map can reveal vulnerabilities, such as large volumes of supplies flowing into high-risk regions.
Identify, investigate, and confirm anomalies. Review transactions for accuracy, authorisation, existence, and approval. Look for anomalies by, for example, assessing the responsiveness of the supplier, checking the information of an invoiced item and the rate charged, looking for any notations providing information about a transaction. Get documentation to vet gathered transaction data.
Find out about grievances amongst employees of suppliers by running anonymous, short surveys on mobile devices, offer a hotline, or audit suppliers
Track, manage, and learn from the information. Establish a supplier database that contains compliance and risk data, such as audit history, total spend, and geographic location. Sort suppliers into risk tiers to help prioritise, manage, and enact corrective action plans.
Validate observations with suppliers.
Remedy fraud, waste, or abuse by working with legal counsel and the supplier to reach a mutually agreeable settlement.
Related CGMA Magazine content:
“Identifying Fraud, Waste, and Abuse in the Supply Chain”: Many companies worldwide struggle to get a handle on fraud, waste, and abuse risks in the supply chain. A Deloitte fraud investigator offers seven questions that may lead accountants to breaches.
“How to Make Your Supply Chain Hum”: Companies that sell into and source from markets worldwide compete on their supply-chain capabilities. Find out what supply-chain leaders do to boost their revenue and earnings.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.