How to Detect & Prevent Fraud in SCM pdf

IMPACT MANAGEMENT SYSTEMS EMAIL: [email protected]

Supply Chain Risk Management August 15-16, 2013 1:00-6:00 PM

The Heritage Hotel, Manila

Rey M. De Vera, DSM Management Consultant

Specialized in the areas of: Ø  Supply chain management and audit Ø  Fraud detection and prevention in SCM Ø  Productivity improvement and cost effectiveness Ø  Strategic planning and leadership development Ø  Change management and organization development

n  Rey had worked for Shell Chemical Arabia, the Company that operates from one of the world’s largest and most competitive petrochemical complexes in KSA.

n  Dynetics Semiconductor Philippines n  Dubai Aluminum Compnay Ltd., UAE n  Arinco-‐Aramco’s Oil Projects, KSA n  Halliburton International-‐K B R

n  Had worked as a management consultant for De La Salle-College of Saint Benilde, Manila, Black & Decker Philippines, and Daiichi Electronics Manufacturing Corporation.

n  Post Graduate Diploma in Supply Chain Management from De La Salle-College of Saint Benilde, Manila.

n  Post Graduate Diploma in Organization Development from De La Salle-College of Saint Benilde, Manila.

n  BSBA-Management from University of the East, Manila.

Highlights Of Discussion :

n Fraud Prevention n Fraud Detection n Fraud Investigation

What Is Fraud ?

n A; Deceit, Trickery; specifically intentional perversion of truth….

n B: an act of deceiving or misrepresenting

n Synonym: Deception. n Fraud cannot be by accident or

negligence.

n Fraud is an intentional deception

made for personal gain or to damage another individual;

n the related adjective is fraudulent !

What Is Corruption ?

n  “Corrupt Practice” means the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.

n Bribery and Kickbacks

IMPACT MANAGEMENT SYSTEMS

What Is Collusive Practice ?

n  “Collusive Practice” means an arrangement

n between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.

Fraud Facts

n  30% of all business failures are due to fraud.

n  As much as 80% of fraud is never detected.

n  Only 70.6% of fraud is ever reported.

n  A survey of 1,246 people showed 1/3 had attempted to commit fraud in the last 12

months.

n  48% said the fraud was successful.

NTT Canada Government

$ 650 Billion Annual Losses

n On average 5% revenue

n Fraud losses by men are 2 times more than women.

n The most costly losses are with organizations less than 100 employees

Definition of Occupational Fraud

n “ The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication

of the employing organization’s resources or assets.”

n How would you know if there is fraud in your SCM ?


High Risk Areas ?

n Purchase Order and Invoice Frauds n Picking and Packing Frauds n Return Frauds n Distribution and Shipping Frauds n Receiving Frauds n QA and Manufacturing Frauds n  Inventory Frauds

SCM Code of Conduct…

n  The application of Code of Conduct in our organization is to end-users, requestors, buyers, vendors, QC auditor, and ISO Quality representatives.

n  Vendor scorecards and metrics only work if measured accurately.

n  SPEAR Program works best

IMPACT MANAGEMENT SYSTEMS 15

Reduce Supply Chain Fraud by Detecting it.

1.   Make an assessment of your supply chain in whole or in part, to determine the very best of your abilities.

2. Identify the areas of concern, and also include based on the depth and breadth of your investigation, solutions and recommendations.

n Detection of supply chain fraud relies on the ability to cross-check distinct pieces of information

n Fraud can be perpetrated via various collusion scenarios and along any link in the internal and external supply chain

n Employees can be forced into perpetration frauds in order to keep their jobs.

n Management is the real guilty party not the employees.

n Failure to govern accordingly, the failure to bring integrity into your company’s supply chains will result in an environment where frauds

is able to exist and even grow.

4 Elements in Fraud Schemes

1. The activity is clandestine.

2. The activity violates the perpetrator’s fiduciary responsibility.

3. The activity serves to financially benefit the perpetrator.

4. The activity costs the organization assets, revenue or reserves.

Asset Misappropriations

n  87.7% of all Asset Misappropriations involve cash.

n  Cash Receipts (33.1%)

n  Cash Disbursements (86.3%)

n  23.4% of all Asset Misappropriations involve other assets like inventory, information and securities


4 ways a perpetrator can use his or her influence to obtain undisclosed

personal benefits during a business transaction:

n Bribery n  Illegal gratuities n Extortion n Conflicts of interest


The Cycle of SCM

Requisitioning

Buying

Delivery & Storage

Issuance

‘Red Flag’ in SCM

n Requisitioning n Purchasing n Receiving & Inspection n  Issuance & Delivery n Usage or Consumption n Replacement & Replenishment n Returns


Why Products Move Out

n  Issuance n Transfer n Sales n Wrong Specs from Vendor n Replacement

Breakdown of Corruption Schemes

CONFLICT OF INTEREST

ILLEGAL GRATUITIES

BRIBERY

EXTORTION

40.0%

77.1%

25.0%

25.0%

Initial Detection of Occupational Frauds

NNT Canada Government

TIP

CONTROLS

ACCIDENT

INTERNAL AUDIT

EXTERNAL AUDIT

POLICE

42.2%

18.9%

16.7%

13.3%

6.7%

4.4%

Gender of Perpetrators

National Institute of Justice May 5, 2006

28.9 %FEMALE 71.1% MALE

Anti-Fraud Tactics are used ?

Internal Audit

External Audit

Fraud Training

Tip Hotline

Surprise Audit

65.2 %

50.6 % 50.6 % 49.4 %

21.3 %

CONTROL CASES PERCENTAGE %

External Audit

58 65.2 %

Internal Audit

45 50.6 %

Fraud Training

45 50.6%

Surprise Audit

44 49.4%

Tip Hotline 19 21.3

National Institute of Justice, USA May 5, 2006

Investigating Fraud

n  Male (61%) n  Accounting (30.3%) Manager (41.2%) n  Been with the company for over 10 years (37.7%) n  Has an undergraduate degree (33.4%) n  Is between 41 – 50 years old (34.6%) n  No previous criminal record (87.9%)

National Institute of Justice , USA

The Fraud Triangle

n  1. Motive – most often financial pressure from gambling, drug use, expensive lifestyle.

n  2. Opportunity – weak internal controls that lead to a perceived lower potential of being caught

n  3. Rationalization – believes that they are underpaid or thinks that boss is also stealing.

The Triangle Of Fraud

MOTIVE

RATIONALIZATION

OPPORTUNITY

Profiling the Fraudster

n Things to look for:

n New fancy car n New fancy house n New fancy girlfriend or boyfriend n Expensive trips n Dramatic lifestyle changes


n  This environment has not stopped the fraudster; rather, he/she has been forced to change tactics and targets.

n  The modern “professional” fraudster has become more sophisticated, developing schemes to maneuvre around accounting controls

DEPARTMENT CASES

Purchasing

Warehouse Manufacturing Sales Marketing Customer Service HR MIS R&D Internal Audit

25 23 31 115 13 92 15

20 10 2

‘ Red Flag ‘

n What to do when you suspect fraud ?

Stage 1

n  Continue as normal

n  Begin a covert investigation using trusted internal investigators and or external specialists

n  List all reasons for suspicion

n  Keep a detailed log of all actions and events from first suspicion

Stage 2

n  The management can search for evidence.

n  Full background check on suspect companies previous employers and records

n  Download and analyze suspects work computer

n  Detail analysis of transactions, documents, files

n  Detail analysis of phone records, etc.

What You Should Not Do :

n  Suspend or dismiss suspect

n Question any suspect or potential witness n Make any unsubstantiated accusations

n Make any other action that may compromise your investigation

Stage 3

n  Contact your attorney for Civil Suit

n  Contact law enforcement for Criminal Suit

n  Let others know that this activity will not be tolerated

Cracking Down on Unethical Practices

n  Collusive Bidding

n  Restrictive Condition in Specification

n  Artificial Stimulation of Demand

n  Sabotage of Competitive Products

n  Padding of Orders and Shipments

n  Use of Unfamiliar Terms & Measurements

n  Obscure Contract Clauses n  Excessive Sample Orders

Investigation Process in Embezzlement


1.   Determine if the embezzlement actually occurred.

2. Finding out the total amount of the theft, and how it occurred

3. Removing the culprits from the workplace and taking further action to make sure that the theft does not continue into the future.

End Of Presentation

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How to Detect & Prevent Fraud in SCM pdf

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Transcript of How to Detect & Prevent Fraud in SCM pdf