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Companies Encouraged to Use Data Analytics To Proactively Target Supply Chain Abuse, Fraud

Tuesday, April 22, 2014

By Tina Chi  

April 16 --In light of the increased risks of doing business in a volatile global economy, companies would be wise to use data analytics tools to more effectively detect possible problems in their supply chains, Mark Pearson, a principal at Deloitte Financial Advisory Services LLP, told Bloomberg BNA in a recent interview.

By proactively identifying and examining anomalies using data analytics tools, Pearson said, companies can more likely increase overall profits and mitigate the risk of fraud, waste and abuse with their third party relationships.

Pearson noted that companies that are not already doing so should balance forensic accounting processes with advanced data analytics methods to home in on any inconsistencies in their third party transactions. Companies should maintain a “forensic mindset” in examining any “big data” they collect on their supply chains to “provide a clearer context to suppliers and transactions,” he said.

Pearson's advice is supported by survey results from a Feb. 26 Deloitte webcast that polled more than 2,600 business executives. The survey found that while some respondents are just starting to learn how data analytics software works, a few have not even begun using data analytics processes. The survey indicated that less than one-third of respondents are actually using data analytics tools to detect fraud, waste and abuse in their supply chains.

SUPPLY CHAIN FRAUD PREVENTION

Proactive Ways for Companies To Target and Halt Fraud, Waste and Abuse

Mark Pearson, a principal at Deloitte Financial Advisory Services LLP, offers some suggestions:

• conduct regular appropriate supply chain due diligence;

• establish financial stability of suppliers;

• review payroll costs and employee numbers to target underpayment, overstaffing or unauthorized overtime; and

• include the “right to audit” in supply chain agreements.

 

Proactive, Not Reactive, Approach

Pearson noted that business intelligence methods--which generally rely on data in standard business and ad hoc reports and notifications based on analytics--tend to be reactive rather than proactive. In most cases, he noted, business intelligence draws from public records searches. While this can be helpful for supply chain forensics, “usually when we are trying to help a company identify fraud, waste or abuse in their supply chain, data analytics helps us uncover even more details such as, for example, invoice charges that contradict the contract. This better enables us to help the client recover lost funds,” he said.

Both business intelligence and data analytics are ancillary to forensic accounting, Pearson explained. “Incorporating advanced data analytics methods into the forensic accounting process enables us to expand our scope to a broader population of transactions,” rather than confining forensic accountants to a just a “small slice” of data, he said.

Data analytics is not so much a product as it is a process, Pearson said. “It involves the gathering of data in any form … extracting the usable and relevant information from those sources in order to facilitate decisions to be made about the underlying content.”

Finding efficient and effective ways to deal with large amounts of data is a prevailing struggle for large organizations, he noted. “One of the largest areas where we find problems tends to be within labor. An individual labor charge tends to be relatively small, but the volume and daily recurrence of those labor charges add up to be pretty significant,” he said.

Companies Question Data Quantity

According to Pearson, some companies that are not using data analytics are not doing so because they think they are not generating the data that would make data analytics worthwhile. “This notion illustrates a misunderstanding of the overall value of data analytics. I would contend that every business is generating electronic information or paperwork that can reveal patterns, trends or anomalies through analysis,” he said.

Pearson suggested that within a company, board members, chief legal officers, chief compliance and ethics officers, as well as chief financial officers, controllers and procurement groups, should be familiar with data analytics processes and perhaps even be in contact with data scientists.

There are so many challenges with new data sources in the modern global supply chain, new technologies that heighten the complexity and sophistication of fraud and a “host of common data mining mistakes that could undermine the effectiveness of analytics,” Pearson noted. “Data analytics is an ever-evolving field, so organizations need to continuously seek to expand their existing knowledge base. Education and experience are important to overcoming these challenges.”

Companies will also want to pay special attention to what their supply chain contracts address, Pearson said. Historically, “right to audit” clauses have been included in supply chain agreements, but many companies have been reluctant to specify what information suppliers must provide to the company. “We suggest clients get into detail with suppliers about what data needs to be kept track of and in what time frame,” as this makes the audit process that follows later much more efficient, he said.

Companies also should not be afraid to exercise the right to audit for fear of “offending” suppliers that they have formed long-term relationships with. Companies can maintain a good relationship with their longtime suppliers by approaching the audit as a fact-finding mission, and not a “fraud fishing expedition,” Pearson said.

Survey Results

Twenty-five percent of respondents to the Deloitte webcast survey said that the biggest challenge to their organizations' supply chain fraud detection capabilities was acquisition of a new entity.

In light of the survey results, Larry Kivett, a Deloitte partner, cautioned in an April 3 press release that “[f]ailure to adequately and actively monitor supply chain relationships can substantially increase a company's risk of significant financial losses, as well as exposure to legal and regulatory investigations, civil and criminal litigation, and reputational damage.”

About 31 percent of survey respondents said their company has faced supply chain fraud, waste or abuse in the past 12 months. Further, 40 percent of these executives have a program in place to target and stop supply chain abuse, and 28 percent of respondents said they do not have a program in place.

More than 2,600 professionals from industries including consumer and industrial products; public sector; technology, media and telecommunications and financial services responded to a survey contained in a Feb. 26 webcast, titled “Supply Chain Forensics: Identify Fraud, Waste, and Abuse in Your Organization.”

 

To contact the reporter on this story: Tina Chi in Washington at tchi@bna.com

To contact the editor responsible for this story: Kristyn Hyland at khyland@bna.com


The survey is available at http://www.deloitte.com/view/en_US/us/Services/Financial-Advisory-Services/377e895ba80d4410VgnVCM3000003456f70aRCRD.htm
?id=us:2el:3pr:faspr:awa:fas:040314:poll
.

The archived webcast is available at http://www.deloitte.com/view/en_US/us/Services/Financial-Advisory-Services/1d2d82cb13103410VgnVCM1000003256f70aRCRD.htm
?id=us:2el:3pr:faspr:awa:fas:040314:rply
.

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