Thursday 17th April, 2014

According to a new study by Deloitte Consulting LLP, a surprising number of business executives are leaving their supply chains vulnerable to financial fraud, writes Forbes.

Polling more than 2,600 executives, the study found that fewer than a third of respondents were deploying the kind of data-analytics tools that can detect fraud or waste by vendors. Another 13% had the necessary tools but were still learning to use them, while 22% had no data analytics of any kind.

Many managers, lacking sufficient knowledge of information technology, do not understand “the power of analytics,” said Deloitte principal Mark Pearson. As a result, they are failing to submit their invoices and contracts to the necessary level of scrutiny.

In addition, Pearson said, many companies harbour an attitude of “it can’t happen here.” Yet “folks who do fraud investigations every day recognise that it exists in most organisations.”

Part of the problem lies with the nature of “big data” — the existence of so many inputs that companies are having a tough time sorting through the noise and deriving information of value. Pearson said companies are doing a better job of identifying high-level trends in invoice characteristics than they are scrutinizing individual line items. But the latter is where most of the fraud resides.

Financial fraud among vendors and their subcontractors can take many forms. The worst, in terms of potential dollar impact, involves collusion between a company employee, usually in a procurement role, and an outside party. The buyer might be getting kickbacks or other financial incentives in exchange for using the vendor’s services. Another possibility is an employee creating a false vendor and submitting invoices on its behalf.

Perhaps most difficult to detect is misconduct by the vendor, often in the form of falsified labour and inflated bills. Then there’s the familiar pumping up of expense accounts and other kinds of allocated charges.

At the very least, one might assume that companies are carefully monitoring the expenses of their own employees. Often that isn’t even the case, said Deloitte partner Larry Kivett. “In our experience, labour-related charges, per diems and hotel, travel and expense charges tend to be pretty problematic.”