Supply chain fraud has become a significant challenge for industry supply chains. According to a study conducted by Deloitte Financial Advisory Services LLP, supply chain professionals still appear to be ill-equipped to tackle instances of fraud.

Supply Chain Matters recently had to opportunity to speak with Deloitte partner Larry Kivett about the background, results and implications of this recent study.

The Deloitte findings involving over 2000 professionals across varied industries highlighted key concerns related to supply chain fraud. The study reported that more than one-quarter of professionals (28.9 percent) indicate that their organizations experienced supply chain related fraud, waste or abuse during the past 12 months, yet nearly as many (26.8 percent) indicated no program currently in-place to detect or prevent such risks.  These findings alone are significant, considering that many firms are not comfortable with admitting or acknowledging instances of fraud, and thus occurrences are probably far larger. As to sources of fraud incidents, respondents pointed to employees as the top identified source (22.9 percent) when compared to suppliers (17.4 percent) and other third parties, subcontractors or vendors (20.1 percent). The study authors noted that internal employees can leverage transactions involving vendors and/or third parties for fraud purposes, and when collusion is involved, detection and prevention is difficult.

Our conversation with Larry Kivett reinforced that while many firms recognize reputational, litigation and regulatory repercussions of fraud, internal budgetary constraints remain a significant challenge. The size of a company is a further variant. We touched upon the overall implications of more globally dispersed supply chains that add challenges in introducing different business practices further away from corporate based internal controls, compliance and oversight adding to instances of supply chain related fraud.

We explored the specific question of who owns or is directly accountable for fraud.  Kivett indicated that fraud is indeed a shared responsibility that has to involve first-line people at the operational level.  It is not just the responsibility of finance or audit control teams. He further acknowledged that there is no perfect system to prevent fraud.  It requires constant diligence.

Other significant Deloitte findings were that nearly two-thirds (65.3 percent) of respondents reporting that their company conducts at least some due-diligence on third-parties. However, incidents of fraud continue. While the Deloitte study did not specifically address cyber theft and fraud focused from vendor, subcontractor or supplier access to a company’s operational systems, such as the data breach incident that impacted Target Stores last year, Kivett indicated that cyber theft has indeed become a significant topic in current boardroom discussions. That should be no surprise.

If readers are seeking more detail related to the Deloitte supply chain fraud survey, a February recorded webcast is available for replay. (Sign-up information required)

Supply chain fraud is indeed a growing problem that has many internal and external dimensions.  A June 2014 study conducted by the Association of Certified Fraud Examiners (ACFE) quantified that as much as 5 percent of revenues are lost each year due to fraud, amounting to $3.7 trillion annually. Supply chain teams cannot afford to ignore this challenge.

Bob Ferrari