Blog Post

Supply disruptions and the need for vigilance

Bruce Dorris, J.D., CFE, CPA

From paper to computer chips, products we once took for granted have become precious commodities as the global supply chain cracks under the weight of labor shortages and renewed demand in the wake of the COVID-19 pandemic. And as every fraud examiner knows, whenever there’s a need for a product or service, fraudsters are there to exploit it for their own gain.

These schemes are already happening amid news of unscrupulous vendors selling bogus goods to desperate companies struggling to source vital components. But the situation also creates the economic pressures that can push executives within a company to resort to fraudulent activities.

In this issue’s cover story, Fraud Magazine explores the supply-chain problem and the types of fraud that could emerge due to the economic fallout from this extraordinary event. Just like the pandemic’s early days, company executives are trying to cope with unprecedented conditions. The dearth of everything from microchips to basic construction materials has caused a ripple effect throughout the economy, and management has had to devise creative ways to keep businesses operating as goods remain stuck in ports.

Without inventory to sell, some businesses are struggling to meet financial targets and might have to breach covenant thresholds on loans. These scenarios could be potentially devastating, especially for small-business owners, who arguably have fewer options than large multinationals. Under such pressure, someone might be tempted to rationalize a need to fudge the books.

That’s why CFEs, regardless of industry, must be mindful of these problems and how executives might play with financial numbers in ways that cross into fraudulent territories. It could be as simple as overstating inventory or sales, or recording revenue in the wrong accounting period. As we already know, financial statement fraud takes many forms — far too many to list here. But we’re trained to get inside the minds of fraudsters and do all we can to prevent or limit this type of wrongdoing. By always using our keen professional skepticism, we can collectively reduce the fraud creeping through the supply chain.

As Clay Kniepmann, CFE, a senior manager at Anders CPAs + Advisors, says in this issue, “Any industry can be susceptible to supply-chain fraud, particularly if they lack or have inadequate internal controls, have a complex supply chain, often deal with international or unfamiliar suppliers, and/or are in a position of great pressure.’’

Regardless of our position, we must remain vigilant and objective, thinking through the processes in place to uncover the potential for fraudulent activity. Supply-chain issues have exposed weaknesses for sure — but we’ve continuously proven we’re up for the task.

SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners

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