In the Association of Certified Fraud Examiners’ (“ACFE”) 2022 Report to the Nations on Occupational Fraud and Abuse, they break down white collar crimes by industry, highlighting the common scams that manufacturers need to watch for and ways for them to minimize potential losses from fraud. The ACFE’s 2024 Occupational Fraud: Report to the Nations found that median losses from occupational fraud increased 24% compared to the 2022 study, underscoring that risks continue to grow for manufacturers.
How much does fraud cost?
The ACFE estimates that the annual cost of fraud globally is roughly $4.7 trillion, based on data compiled from 2,110 real cases of fraud investigated in 133 countries, which totaled $3.6 billion in losses, with an average loss per case of $1.78 million. That’s a significant amount of money, but what hits closer to home is how much fraud affects individual victim organizations.
The median loss worldwide caused by the frauds was $117,000. Even more disheartening is the median loss for manufacturers of $177,000. However, median loss for organizations with fewer than 100 employees was $150,000. The largest fraud losses were due to dishonest owners and executives with a median loss of $337,000. More recent data shows manufacturing continues to rank among the industries with the highest number of fraud cases (175 cases) and a median loss of approximately $267,000.
Which fraud schemes are most common?
The ACFE breaks down its findings by industry, and manufacturing ranks eighth in terms of the frequency of fraud cases. The most common fraud schemes reported by manufacturers include:
- Corruption. More than half of manufacturers in the study (59%) fell victim to these scams. Corruption includes bribery, illegal gratuities and economic extortion.
- Billing scams. About one-fourth of fraud cases (26%) involved billing ploys either with customers or vendors. These scams may include submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.
- Noncash theft. Rounding out the top three categories, noncash ploys were reported in more than 23% of fraud cases. These incidents often involve theft of such valuable assets as inventory and equipment.
In addition, to these schemes, manufacturing fraud cases also involved financial statement fraud (12%), expense reimbursements (10%) and payroll (10%). Many fraudsters test the waters with entry-level scams such as asset misappropriation which is the most common type of fraud across all sectors but the least costly at a median loss of $100,000. Then they graduate to bolder schemes such as financial statement fraud with is the least common across all sectors but the most expensive at a median loss of $593,000.
Manufacturers also face evolving risks such as:
- Supply chain and vendor fraud, including fake vendors or altered payment instructions
- Substitution of counterfeit or substandard materials
- Manipulation of inventory through scrap, returns, or write-offs
How can manufacturers fight fraud?
U.S. businesses lose millions of dollars to white-collar criminals every year. The manufacturing sector is especially vulnerable to fraud schemes involving corruption, billing, and noncash assets, such as theft of inventory and equipment. Compare your organization’s fraud risks by industry, region and size. Benchmark your anti-fraud efforts against similar organizations and against the most effective methods for reducing fraud losses.
Fraud prevention and detection measures don’t necessarily have to be expensive to be effective. According to the ACFE, the anti-fraud controls that offer the highest potential return on investment — that is, offer the biggest reduction in comparative median fraud losses — are as follows.
- Background checks are an important tool in the fight against fraud. This includes employees and vendors, supported by a formal vendor onboarding process that screens for prior misconduct.
- Internal controls were the most common weakness amongst all organizations that experienced fraud. Lack of internal controls accounted for 29% of cases and an override of existing controls accounted for 20% of cases. Examples include implementing job rotations and a mandatory vacation policy, segregating duties, and requiring dual approval for high-risk disbursements.
- Management review was the most common change made after a fraud occurred, with 75% of victim organizations modifying their anti-fraud controls. This includes active review of financial statements, time and expense reports, and exception reports by upper management.
- Data monitoring and analysis techniques were the second most common change made after a fraud occurred with 64% of victim organizations modifying their anti-fraud controls. Examples include trend analysis on scrap and write-offs, exception reports on vendor master file changes, and continuous monitoring of high-risk GL accounts.
Research suggests that businesses that provide a convenient and confidential way for employees to report unethical behavior are more likely to unearth embezzlement and other wrongdoing sooner and suffer smaller losses than those without established “whistleblower” policies.
Across the board, the presence of anti-fraud controls was correlated with lower losses and quicker fraud detection. More specifically, 42% of frauds were detected by tips, which is nearly three times as many cases as the next most common method. Recent ACFE data shows tips still account for roughly 40–43% of fraud detections, with most tips coming from employees.
Even smaller manufacturers should implement right-sized controls. Organizations with fewer than 100 employees often experience significant fraud losses due to limited segregation of duties and fewer formal controls.
Employees are more likely to report fraud if the company acts on tips in a prompt, serious manner and demonstrates a zero-tolerance policy for fraud. The most serious allegations should be reviewed with legal counsel first. Often timely follow-up necessitates the use of an outside forensic accounting specialist who is trained in collecting a thorough and defensible trail of evidence.
How should victims handle fraud allegations?
Many of the fraud victims in the ACFE study haven’t yet recovered a dime from the perpetrators. Many worry that prosecuting criminals could lead to bad publicity. Others prefer to just fire the wrongdoers and then focus on recovery, rather than spend time and resources pursuing a financial settlement or conviction.
Prosecuting fraud may be worthwhile for several reasons, however. It sends a message to would-be thieves that management has adopted a zero-tolerance policy, thereby deterring future crimes. In addition, a conviction will be reported on the fraudster’s permanent record, which may prevent him or her from striking other victims in the future. If you suspect fraud, contact your attorney or a forensic accountant for help deciding how to proceed.
The sooner you can act upon discovery, the better you can protect yourself and the company. While the Commodity Futures Trading Commission (“CFTC”) guidance is geared toward investors, its six recommended steps after discovering fraud are a useful checklist for organizations as well.
- Don’t pay any more money
- Collect all the pertinent information and documents
- Protect your identity and accounts by contacting banks to put holds on accounts
- Report the fraud to authorities
- Check your insurance coverage, and other financial recovery steps
- Consider changing behaviors and building your resistance to fraud
How can LBMC help?
Over half of the cases analyzed in the 2022 report were determined to have occurred due to lack of adequate controls. The ACFE report to the nations is an important reminder to ensure your organization is constantly assessing its fraud risk and updating its controls to keep pace with the evolving world of fraud.
If your organization fell victim to fraud or wants to proactively reduce risk, LBMC has the resources and experience to help.
- We can help by reviewing your current control environment and performing an objective fraud risk assessment based on your risk profile and industry norms.
- We can work with management to prioritize remediation steps, design or enhance controls, and help develop monitoring routines. In some cases, stronger controls can also reduce year-end audit procedures and potentially lower audit fees.
Learn more about Internal Audits and contact us for help preventing occupational fraud in your organization.
Content provided by LBMC audit professional, Kayla Carr.
FAQs About Fraud in the Manufacturing Industry
What types of fraud are most common in manufacturing?
Corruption, billing schemes, and noncash theft (such as inventory or equipment) consistently rank among the most common and costly fraud schemes in manufacturing.
Are smaller manufacturers really at risk?
Yes. ACFE studies show organizations with fewer than 100 employees suffer median losses comparable to, or only slightly lower than, larger entities, often because they lack robust internal controls and segregation of duties.
What’s the single most effective fraud detection method?
Tips remain the top detection method, accounting for roughly four in ten detected cases. Most tips come from employees, highlighting the importance of strong whistleblower programs.
How often should we update our fraud risk assessment?
Many manufacturers revisit fraud risk at least annually, or more frequently after major changes such as acquisitions, new systems, or significant supply chain disruption.
When should we bring in a forensic accountant?
Organizations should consider involving a forensic accountant when allegations include potential financial statement manipulation, collusion, or significant dollar amounts — or when an independent, defensible investigation is needed to support legal or insurance claims.
