Manufacturing Conflicts of Interest

Weak and nonexistent controls are leaving manufacturers vulnerable to a host of conflict-of-interest frauds.

Manufacturers have lost US $8.5 million as a result of fraud during the past year, according to the second annual Global Fraud Report published by Kroll, a global risk consulting company. This number is 25 percent higher than the previous year, and nearly nine out of 10 companies suffered from a fraud during the past three years.

The Global Fraud Report cites exploiting conflicts of interest — along with kickbacks and theft — as the predominant fraud type in the manufacturing sector. According to the report, a conflict of interest arises when an employee has a personal interest in a vendor or supplier company. Conflict-of-interest frauds are usually committed by senior managers who have the wherewithal and opportunity, as well as the authority to sign vendor contracts and the power to direct staff.

To mitigate the risk of conflicts of interest, the report suggests making sure employees are aware of the organization’s policy regarding personal interests through training, written policy, and explanatory material. Vendor screening is also an important aspect of reducing the risk of conflicts of interest among procurement and managerial staff, as is a regular review of vendor contracts.

“The Favored Vendor,” featured in the December 2007 issue of Internal Auditor magazine, offers a real-life example of how an unchecked manufacturing manger exploited his company’s weak accounting controls to embezzle US $200,000 through a vendor conflict-of-interest scheme.

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