Fraud is an ever-present threat that Chicago manufacturing companies must carefully guard against. While most are honest and not inclined towards such activities, all it takes is one bad actor. The issues which can be caused by fraudsters extend beyond the expected financial loss to legal issues, reputational damage, and a decline in employee morale. The risk is especially high for smaller manufacturers which do not have the resources to invest in a comprehensive fraud prevention program.

According the Association of Certified Fraud Examiners, Occupational Fraud Report 2022: Report to the Nations there were 194 cases reported with a median loss of $177,000 per incident. It was also found that corruption was the most common fraud tactic used. Such findings provide important insights that management can use to design effective anti-fraud measures. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.

  • Most Common Fraud Tactics – Since businesses in different industries function differently the more prevalent types of fraud tactics used in each industry vary. For the manufacturing industry, the study found that 59% of cases involved corruption, 26% billing, 23% non-cash, 12% financial statement fraud, 10% expense reimbursements, 10% payroll, and 9% cash on hand. Other fraud types in the industry include cash larceny and register disbursements.
  • Most Common AntiFraud Controls – Companies use different types of fraud prevention measures based on particular risk factors. According to the report, 82% had an external audit of financial statements, 82% code of conduct, 77% internal audit department, 74% management certification of financial statements, 71% external audit of internal controls over financial reporting, 70% hotline, 61% employee fraud training, 60% anti-fraud policy, and 59% fraud training for managers/executives.
  • Effectiveness of Anti-Fraud Controls – The presence of controls is only one consideration. According to the report, job rotation resulted in a 54% reduction in loss, hotline 50% reduction, surprise audits 50% reduction, anti-fraud policy 45% reduction, fraud training for employees 45% reduction, formal fraud risk assessments 44% reduction, fraud training for managers 39% reduction, and a dedicated fraud department 33% reduction in loss.
  • Background Checks – There was also interest in learning about the type of background checks run on fraudsters prior to hiring. According to the report, 45% ran an employment history check, 43% had no background checks, 40% criminal checks, 30% reference checks, 30% education verification, and 21% credit checks.
  • Behavioral Red Flags – Across the cases analyzed there were several behavioral red flags present in nearly every case. According to the report, 39% of cases involved a fraudster living beyond their means, 25% financial difficulties, 20% unusually close association with vendors, 13% unwilling to share job duties, 12% bullying or intimidation, 10% divorce/family problems, and 10% a “wheeler dealer” attitude. Other common red flags include social isolation, past legal problems, instability in life circumstances, and pressure to achieve success.
  • Fraudster Related HR Issues – It is reasonable to believe that some fraudsters would have previous issues with human resources. According to the report, 16% fear job loss, 15% poor performance evaluations, 12% denied a raise/promotion, 7% cut in benefits, 6% cut in pay, 6% actual job loss, 4% involuntary reduction in hours, and 4% demotion. It is interesting to note that only 50% of bad actors experienced an HR issue prior to the fraud event.

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Chicago manufacturing companies face the risk of significant loss from occupational fraud. This report’s results convey the need for fraud prevention planning regardless of company size. If you have questions about the information outlined above or need assistance with a forensic accounting issue, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

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