Nearly a third of professionals said their companies experienced supply chain fraud, waste and abuse, according to a recent poll, and the healthcare and energy sectors saw an increase year over year.
Thirty percent of 2,660 professionals participating in a Deloitte webcast on the subject reported experiencing such problematic activity in their companies’ supply chains. That sizable percentage has remained unchanged for the third year in a row, and yet it could be reduced if more companies used analytics. According to Deloitte, only 29.3% reported using analytics to mitigate it and the attending financial risks; meanwhile, 67.1% are confident employees will report any such schemes they see in the coming year.
Mark Pearson, a partner in Deloitte Financial Advisory Services, noted that the Association of Certified Fraud Examiners (ACFE) estimates that companies lose about 5% of their revenues to fraud, or about $3.5 trillion worldwide. The ACFE, however, doesn’t break down the numbers into the types of fraud.
“Given that supply chains tend to be the main source of cash outflows from an organization, I would think an outsized proportion of whatever fraud is going on is most likely to be occurring somewhere within the supply chain,” Mr. Pearson said.
Mr. Pearson said overbillings are the most frequent types of fraud, in which invoices include fabricated or exaggerated charges, services provided, hours, or expenses. Or the charges may be accurate but on behalf of another customer.
“When we go to a vendor looking for fraud, we typically say that we’re seeking to identify whether the expenses the vendor charged our client occurred, whether they’re accurate, and lastly whether they were incurred accurately to the benefit of our customer, who was billed,” Mr. Pearson said.
Labor charges are fertile areas for fraud. For example, Mr. Pearson said, there are several levels at which fraud can occur when manufacturer hires temporary labor from another firm. They include whether the employees actually worked the time billed for, and whether the persons overseeing them and in accounts payable are trustworthy.
“There are a lot of areas where somebody, because of pressure from a boss to improve financial performance or because they’re seeking to enrich themselves, can manipulate or change these numbers,” Mr. Pearson said.
Conflicts of interest is another ripe area for fraud, Mr. Pearson said, noting that instead of sending out RFPs to three potential vendors to solicit the best bid, a procurement executive may steer the business to a friend or relative. Besides the financial repercussions, he added, such fraud can result in significant reputational damage, especially in industries such as life sciences where pricing is now in the spotlight.
“Over the next three to five years if not sooner we’re likely to see a hyper focus on life sciences pricing, which has an impact on supply chains,” said Mr. Pearson, adding that all companies are likely to receive more scrutiny, if not from government regulators then customers. “They’ll say, ‘We want you to make a profit, but we also don’t want to be gauged.’”
More attention to analyzing supply chain-related data would prevent much of the fraud waste and abuse. For example, vendors typically create Excel spreadsheets detailing the numbers behind the physical invoice sent to the client and, Mr. Pearson said, they will send both along if requested.
“In the labor example, the company may now see that the cost of living in City B is 15% lower than City A, and yet it is paying three times as much for temporary labor,” said Mr. Pearson. “Why is that?”
The recent attention paid to the pricing of drugs, prompting companies to scrutinize their supply chains for cost aberrations, is a likely cause of the increase in fraud, waste and abuse in the life sciences and healthcare sector. Pricing pressure may be a cause in the energy and resources sector.
“People that might have been on the fence yesterday about whether to perpetuate fraud may, if they’re likely to lose their job anyway, decide they might as well dip their fingers into accounts payable, or set themselves up as a vendor so after they’re gone they can get work from a buddy who still works in the company,” Mr. Pearson said.