Fraud is estimated to be a $3.5 trillion annual business with the typical company losing 5% of its revenue each year. Managing the risk of fraud is challenging for any organization, but especially for a company in the manufacturing industry.

When ranking the number of frauds committed over the past 10 years, the manufacturing industry has been within the top five each year.

There are several reasons for this:

  • Decentralized operations make it difficult to ensure policies and procedures are being followed properly at all locations
  • Limited security and/or the size of certain products or supplies make it easy for employees or others to misappropriate assets
  • The use of low wage factory workers, especially in foreign locations, allows for employees to rationalize fraud
  • The increasing use of new technology allows hackers and outside fraudsters new opportunities to commit fraud
  • The complexity of accounting for inventory allows accounting personnel to cover up frauds
  • The tough economy continues to add pressure for management to meet or exceed budget

The continued increase in fraudulent activities is one of the reasons the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has published a Fraud Risk Management Guide. Over the past 30 years, COSO has developed an internal control framework that is widely accepted and used and has provided thought leadership in the areas of enterprise risk management, internal control and fraud deterrence.

The Fraud Risk Management Guide’s executive summary emphasizes that deterring fraud is achieved when an organization has a strong fraud risk management program, which includes:

  • Establishing visible and rigorous fraud governance policies
  • Creating a transparent and sound anti-fraud culture
  • Performing a thorough fraud risk assessment periodically
  • Designing, implementing, and maintaining preventive and detective fraud control processes and procedures
  • Taking swift action in response to allegations of fraud, including, where appropriate, actions against those involved in wrongdoing

The guide includes examples of key program components and resources that organizations can use to effectively and efficiently develop a fraud risk management program. The guide also contains references to other sources of guidance for tailoring a fraud risk management program to a specific industry. It is designed for use by any organization, no matter the size or industry, and is highly recommended for companies in the manufacturing industry.

Our Recommendations
At Dean Dorton, we have assisted organizations in implementing various components of this fraud risk management program and have seen firsthand how it can reduce fraud. We recommend that your company starts by evaluating your existing business environment and gaining an understanding of the policies, controls, and processes you currently have in place. Secondly, you should gain an understanding of the objectives and mindset of your board of directors (or other governing body). This will give you a good idea of where you are today, what gaps you might have, and where you want to be. The COSO guide can then be leveraged to help you develop a strong fraud risk management program.

Questions?
Contact Jim Tencza at jtencza@deandorton.com.