A Chocolate-Covered Fraud: Manufacturing and Fraud Risks

When it comes to fraud and theft, manufacturers are inherently at risk because of the nature of their operations. Not only do manufacturers have traditional fraud risks associated with cash management processes as well as cyber-security risks facing everyone today, they also have non-cash assets that can be valuable.

In this article, a manufacturer carried inventory that is enjoyed by consumers far and wide – chocolate bars. A risk assessment for this company would highlight several issues, but without a formal assessment it would be easy to miss some of the key risks featured in this case.

Several prevention techniques unique to a manufacturing operation are discussed in the article, many of which are mainstays of prevention techniques espoused by the Association of CFEs:

• Segregation of duties – this is a tried-and-true strategy for fraud and/or error prevention. The opposite would be a concentration of duties and represents a risk. Always try to separate the custody, authorization, and recordkeeping aspects of operations.
• Operational data – marrying up operational data with financial data is critical. Accounting and finance executives should look for any and all data to assist in the analysis of a company’s performance and search for fraud or errors, as well as trends.
• Surprise audits – in this case, the company conducted a surprise stock count that resulted in discovering and bringing down the fraud. Proactive and unpredictable measures can zoom in on a specific element of an operation. The existence of surprise controls provides a beneficial by-product as well. If employees never know what’s coming, they may be less inclined to initiate a fraud scheme for fear of getting caught by the next surprise.
• Underqualified supervision – Particularly with small and medium sized enterprises, the person tasked with oversight of the finance function may not have adequate training and experience in supervising subordinates in those roles. In this article, the CEO was focused on a few operational aspects of inventory, but disregarded several others. After the fact, they started to focus their inventory management conversations on multiple KPIs. In cases where a supervisor may not have adequate training, it is advisable to take a team approach to supervision of key areas. In this case, the facts and results may have been different if the CEO continued to ask about his concerns, while another individual focused on the others.

Another key element in this case relates to the magnitude of a discrepancy. The differences noted in the production numbers was consistently 10 kg of chocolate under-reported – modest in most respects, but consistent. The relatively small discrepancy per order added up to a much larger amount in the end, and likely contributed to the length of the fraud.

Maintaining high standards in data accuracy and production performance is critical to preventing fraud but perhaps, more importantly, you also have to trust your gut. When something just doesn’t feel right, follow your intuition and don’t let anyone dismiss an issue until you are satisfied that everything checks out. You may not only prevent a fraud, but you may learn something about your operation along the way.

© Clark Nuber PS and Focus on Fraud, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.