{"id":285,"date":"2020-09-03T05:13:47","date_gmt":"2020-09-03T05:13:47","guid":{"rendered":"https:\/\/www.cac.net.in\/blog\/?p=285"},"modified":"2024-10-11T16:15:20","modified_gmt":"2024-10-11T10:45:20","slug":"fraud-risks-in-manufacturing-sector-post-corona-virus-2","status":"publish","type":"post","link":"https:\/\/www.cac.net.in\/blog\/fraud-risks-in-manufacturing-sector-post-corona-virus-2\/","title":{"rendered":"Fraud risks in Manufacturing sector post CORONA Virus"},"content":{"rendered":"\n<p>In recent pandemic\nglobal economy has effected manufacturing sector seriously. Corona Viruswas\ndetected in India in early March 2020 lockdown was initiated in the fourth week\nof March for 3 weeks and most of the non-essential manufacturing units were\nasked to stop producing and take strict measures before re-opening their units,\nwhich affected the sector badly in which employees lost their jobs and man\nhours, apart from that growing financial burden further pressurised the sector\nto rationalise and look at other alternatives to stay in business and relook\nthey way they run their businesses. <\/p>\n\n\n\n<p>Unfortunately,\npost this pandemic the manufacturing sector is facing challenges which haveimpactedtheir\ngrowth and has bought new and unforeseen challenges. Squeezed margins has been\none of major concern for this sector conventionally, andtheir margins gets\nfurther squeezed with incidents of reported and unreported frauds as it eats\ninto its left-overprofits from businesses and affectsits profitability and\ngrowth. Before mentioning or initiating a fraud investigation one should\nunderstand the sector, the products manufactured, geography where its operating,\nmanpower and local challenges that the sector faces. <\/p>\n\n\n\n<p>Manufacturing\nsector has been an integral part of global growth story since industrial age, similarly\nGovernment of India over the years had made changes to its policies which has\nmade India as an upcoming and preferred manufacturing hub in Asia. Manufacturing\nalso has multiple sub-sectors such as IT, automotive, engineering,\npharmaceutical which are driving employment and are contributing towards countries\nGDP. <\/p>\n\n\n\n<p>According to\nACFE latest report released in 2020 \u201cReport to the Nations\u201d most common\noccupational fraud schemes in manufacturing sector is \u201ccorruption\u201d which\naccounts for 50% of fraud and accounts for an average of $198,000 median loss\nto its principal in this sector. Inevitably, fraud risks not only hurt bottom\nlines but possess other serious implications such as reputational and\nregulatory risks. The outcome of which terrifies organisations and its management\nas it drains resources and hurts investors trust, shareholders investments,\nemployee\u2019smorale, and consumer confidence. Mitigating and preventing fraud in manufacturing\nsector is therefore important as it can prevent potential losses, strengthen\nbusiness, boosts morale and gainsand holds its competitive advantage over its\ncompetition.<\/p>\n\n\n\n<p>How vulnerable is manufacturing sector?<\/p>\n\n\n\n<p>Global manufacturersare\nvulnerable to fraud due to multiple reasons which includes high inventory (raw\nmaterial, unfinished and finishedmaterial), making it susceptible for inventory\nfraud methods and non-cash theft. Apart from that bribery and corruption from associated\nvendors and conventional fraud methodssuch as falsification in accounting books\nor tinkering of financial statements continue to thrive. Although the sector is\ngearing up to draw the benefits of technology and automation, fraud risks still\ngrow in manufacturing sector. Here are few uniquetraits of the sector which\nmakesthem vulnerable to fraud:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Unmonitored supply chains,\nwhich have a potential loophole for fraud to occur. Large and complex supply\nchains involve multiple physical activities and several interrelated\ncomponents, which breed potential risks at various stages &#8211; from sourcing of\nraw material until the final product reaches the consumer.<\/li><li>Multiple third parties dominate\nthese sub-sectors, such as Aerospace, Pharma, Auto, Textiles, ITandany unethical\nactions from one third-party directlyeffects entire chain of organisation and its\nemployees.<\/li><li>Most of the manufacturers post\nCOVID-19 disruption are struggling to restart their businesses as they are\nunsure of the raw material and consistency of its supply. Moreover, these vendors\nare struggling to get trained man-power or other raw material to provide to their\nprincipal and underlying assets in form of inventorycarries a high risk of\nfraud and theft.<\/li><li>Other key risk is government\ntouchpoints for complying in obtaining or revalidating their licences and other\npermits to restart their businesses and concomitant risk of bribery and\ncorruption looms large. <\/li><li>Other severalregulardeals which\nare often have a low value are susceptible to specific fraud schemes which hurt\nthe sentiments of the sector.<\/li><\/ul>\n\n\n\n<p>Some of the other possible red flags of fraud in manufacturing sector\ninclude:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Abnormalsurge in billing\nvolume, receiving inflated invoices or several payments made to such vendors\nwithout any subsequent services provided.<\/li><li>Evidentcorrelations and\nconnections between company employees and third-partyvendors involved in procurement\nor purchasing of material\/goods or involved in distribution of crucial\ncontracts.<\/li><li>Disproportionate contraction in\ninventory levels.<\/li><li>Vendors who are consistently being\nawarded valuable contracts despite their mediocre performance, absence of any specific\nadvantage over his competition.<\/li><li>Unexpected and unjustified rise\nin consumergrievances which can be also attributed to other reasons such as fake\/similar\nlook alike products.<\/li><li>Compensation or gratification\npayments offered to employees\/agents\/distributors on account of redirecting\norders.<\/li><\/ul>\n\n\n\n<p>How can we fight fraud in the manufacturing sector?<\/p>\n\n\n\n<p><em>Initiate <a href=\"https:\/\/www.cac.net.in\/fraud-risk-management\">fraud risk management<\/a> programme or fraud risk assessments:<\/em><\/p>\n\n\n\n<p>Address crucialexposuresin\nmanufacturing sector while composing fraud risk policy. One should understand\nthe product offered and then consider risks associated with them which can be\nassociated to third-parties or counterparties, non-cash fraud and conflict of\ninterest. Another key concern which should be addressed is fraudulent\ndisbursements, which are widespread and can be checked with suitable\nsegregation of duties within departments and key employees.<\/p>\n\n\n\n<p><em>Strong Internal\ncontrols: <\/em><\/p>\n\n\n\n<p>Every manufacturing\nsector relies on its internal controls to survive, strong internal controls are\nessential to prevent fraud and timely detection. Internal controls ensuredepartments\nkeep appropriate documentation which helps in maintaining crucial paper trail while\nmonitoringvarious processes.Keeping controls in place also addressesconcerns\narising from out-datedcash disbursements issues and encourage electronic modes\nof payments to employees, vendors and other third parties.Consider including strong\nand vigilant whistle blower policies and internal due diligence for reporting\nunethical behaviour, code of conduct, etc. For any internal control to be\neffective, periodic reviews and monitoring are crucial.<\/p>\n\n\n\n<p><em>Strengthen\nand use of technology: <\/em><\/p>\n\n\n\n<p>Companies who\nhave advance technological advantage have seen that technology has become their\nfirst line of defence for their businesses to detect and prevent fraud. Using\nsophisticated software and IT systems, analysis of voluminous data helps them detect\npotential anomalies and data monitoring which signifies reduction in losses due\nto fraud. Moreover, it can provide with data which can help getting rid of\nredundant processes and improve efficiency.<\/p>\n\n\n\n<p><strong>Conclusion:<\/strong><\/p>\n\n\n\n<p>Manufacturing sector globally would continue to be exposed to frauds which might hamperits growth. However, if sector can introduce robust Fraud Risk policies and initiate regular <a href=\"https:\/\/www.cac.net.in\/\">Fraud Risk<\/a> Assessments which can identify and mitigate these threats. Apart from that it is also important for manufacturing sector to diligently onboard an employee or a third party as that will help them making a informed decision and will help them build a strong internal control mechanism. Though, frauds will continue to grow, and serial fraudsters will devise new methods to defraud individuals and companies, initiating and implementing tailored made anti-fraud controls and policies can significantly reduce or can even eliminate threats of frauds.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In recent pandemic global economy has effected manufacturing sector seriously. Corona Viruswas detected in India in early March 2020 lockdown was initiated in the fourth week of March for 3 weeks and most of the non-essential manufacturing units were asked to stop producing and take strict measures before re-opening their units, which affected the sector&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[196],"tags":[70,71,72],"class_list":["post-285","post","type-post","status-publish","format-standard","hentry","category-forensic-accounting-fraud-detection","tag-fraud-risk-management","tag-fraud-risk-management-company","tag-fraud-risk-management-compnay-in-delhi"],"_links":{"self":[{"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/posts\/285","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/comments?post=285"}],"version-history":[{"count":1,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/posts\/285\/revisions"}],"predecessor-version":[{"id":286,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/posts\/285\/revisions\/286"}],"wp:attachment":[{"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/media?parent=285"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/categories?post=285"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cac.net.in\/blog\/wp-json\/wp\/v2\/tags?post=285"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}