Manufacturing Companies are Wary of Internal Fraud

Today’s organizations face a perfect storm of fraud related risks – internal, external, regulatory, and reputational. In PwC’s latest Global Economic Crime and Fraud Survey, we gathered responses from more than 7,200 clients and third-party participants across 123 territories – with more than 800 responses from manufacturing companies – to learn how they are affected by fraud and what their future plans are.

While the numbers were generally in line with the global average, a few things stood out specifically for manufacturers. These organizations are wary of internal fraud, viewing asset misappropriation as one of the largest threats to their future levels of success.

A look at the findings:

• Most likely disruptive fraud: Thinking about the next two years, cybercrime is at the top of the list – in line with most industries. However, a close second and nearly 150% feared more likely to happen compared to global companies, manufacturers are concerned that asset misappropriation will be the most disruptive to their organizations.
• Cyber-attack techniques: Malware and phishing techniques lead the way for the most common types of cyber-attacks but, interestingly enough, brute force and other forms of trial-and-error attacks are seen as half as likely to happen compared to other industries.
• Cybersecurity program: Nearly two-thirds of manufacturing companies either have a plan fully in operation or will be implementing one. On the other end of the spectrum, one out of every seven companies do not know if they have a plan or are thinking about implementing one, significantly higher than the global average of one out of ten.
• Risk assessments: More than half of manufacturing respondents said they have performed general fraud risk assessments within the last two years; however, only 9% performed anti-money laundering assessments compared to the global average of 23%. When asked about using technology to monitor for fraud specific to AML, nearly three-quarters indicated they do not use, or are unsure if their companies use technology to combat this.
• M&A due diligence: Manufacturers are 20% less likely to perform anti-bribery and corruption due diligence during the M&A process compared to global respondents.

Manufacturing companies are generally on par with global respondents when it comes to experiencing and preparing for fraud and economic crime. Regardless of whether or not you have been attacked, here are four steps you can take to protect against fraud moving forward:

1. Recognize fraud when you see it – There is an increase in awareness of fraud as more companies understand what “fraud” actually means. But every organization, no matter how vigilant, is still vulnerable to blind spots, and because they only become apparent with hindsight, it’s important to shed light on them as early as possible to enhance fraud fighting efforts.
2. Take a dynamic approach – The C-suite can no longer claim ignorance as an excuse when the financial costs of fraud impact their business. Today’s enterprises are increasingly embedding their newly reinforced fraud prevention measures into their first line of defense. This is an important development, and the more a company learns to react to micro-disruptions effectively, the better prepared it is for responding to mega-crises.
3. Harness the protective power of technology – As companies recognize fraud as first and foremost a business problem, many have made a strategic shift in their approach to technology, making a business case for robust new investments in areas such as detection, authentication, and the reduction of customer friction. However, technology is expensive to buy and to adopt across a large organization, so it’s critical to think through which emerging/disruptive technologies will work best for an organization.
4. Invest in people, not just machines –Technology is clearly a vital tool to fight against fraud, but it can only ever be part of the solution, particularly when it comes to combatting internal fraud. The three principle drivers of internal fraud, or the “fraud triangle,” are incentive, followed by opportunity, and then internal rationalization. Since all three of these drivers must be present for an act of fraud to occur, each of them should be addressed individually. By establishing a culture of honesty and openness from the top down, they can instill open accountability with employees and prevent fraud.

View the manufacturing industry findings from PwC’s 2018 Global Economic Crime and Fraud Survey.

Written by:  Bobby Bono and Todd Ranta for PWC.com.