The Fraud Examiner

Are We Looking Where The Fraud Is?

April 2013 

By Ryan Hubbs, CFE, CIA, PHR, CCSA 


It is a question frequently asked by management, boards of directors and audit committees, but the response given may not necessarily be the same in each organization. Are we looking where the fraud is? Some organizations may decide to dedicate resources to financial statement transactions, others to expense accounts, and yet others still to inventory and assets. However, regardless of the industry, product or service, every entity should be dedicating resources to detect and/or prevent fraud with its vendors and suppliers. 


The data are unfortunately very clear. In the ACFE’s 2012 Report to the Nations on Occupational Fraud and Abuse, corruption and billing schemes — the two types of schemes that most typically involve manipulation of vendor transactions — were two of the top three fraud scheme types in all regions of the world. Billing and corruption schemes also account for some of the highest median fraud losses, with billing schemes resulting in a median loss of $100,000 and corruption causing a median loss of $250,000. Further, many vendor fraud schemes involve an insider at the victim organization, typically an employee in the procurement or purchasing function. While most managers do not want to think that they have untrustworthy employees, the data clearly show that corruption exists and is extremely costly. And the costs do not just include the monetary loss of the scheme; the resulting regulatory costs and fines can dwarf the actual fraud loss. The expansion of the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other bribery and corruption laws and regulations has put the onus on business leaders to be proactive in identifying and preventing fraud, bribery and corruption, or they will face the consequences. For example, in 2008, German company Siemens paid an $800 million U.S. fine as well as an $800 million German fine to settle bribery and corruption charges; an amount that not does include the costs of the investigation, the ongoing monitoring required by the U.S. government or the loss in stockholder value. 


Most organizations rely on vendors to supply the goods and services needed to develop and produce other products or to facilitate business operations. It typically makes good business sense to use contracted vendors and suppliers when they can provide the necessary goods or services at a cheaper price, of better quality, or with more specialized expertise than the purchasing organization has available internally. In a vendor-customer relationship, a contract is usually executed to serve as the formal, documented agreement between the two parties. Unfortunately, simply having a contract in place does not ensure that a vendor will invoice the customer at the agreed-upon rates, deliver the correct quantity or quality of materials, or perform the necessary activities required by procedure or law. The pressures, opportunities and rationalizations that can be catalysts for employee fraud also apply to vendors and suppliers, meaning these organizations cannot always be relied upon to police themselves. 

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