Manufacturers face numerous financial and operational risks, but
one potentially costly threat can come from within their own organizations.
Occupational fraud occurs when employees, managers or executives misuse their
positions for personal gain. These schemes can go undetected for months or even
years, resulting in substantial financial losses.
The Association of Certified Fraud Examiners (ACFE) highlights
the seriousness of this problem in Occupational
Fraud 2026: A Report to the Nations. For manufacturers,
understanding how fraud occurs and implementing appropriate safeguards are
essential to protecting profitability.
The ACFE report in a nutshell
The ACFE report examined 2,402 fraud cases across 143 countries
and territories, involving more than $3.4 billion in losses. The median
loss was $104,000 per case; however, some businesses suffered considerably
greater damage.
Occupational fraud generally falls into three categories: asset
misappropriation, corruption and financial statement fraud. According to the
ACFE's 2026 report, asset misappropriation was the most prevalent, occurring in
90% of cases. Corruption was involved in 45% of cases, while financial
statement fraud occurred in just 6%. However, financial statement fraud was
particularly damaging, producing a median loss of $1 million.
Recognize the warning signs
Manufacturers tend to be especially vulnerable to certain
schemes because of their complex supply chains, substantial inventory holdings
and numerous purchasing transactions. For example, billing fraud may involve an
employee creating fictitious vendors, approving inflated invoices or arranging
payments for goods that were never delivered. In some cases, purchasing
personnel may receive kickbacks from suppliers in exchange for favorable
contracts or inflated prices.
Inventory theft is another concern. Dishonest employees may
steal raw materials, finished products, equipment or other valuable assets.
These losses can be difficult to identify when inventory records are inaccurate
or physical counts are infrequent.
Financial statement fraud, though less common, can also create
serious problems. Employees or executives may intentionally manipulate
inventory valuations, overstate revenue or conceal expenses to make financial
performance appear stronger than it actually is.
Strengthen internal controls
A well-designed internal control system can significantly reduce
opportunities for occupational fraud. The ACFE's 2026 study found that more
than half of the fraud cases involved either inadequate internal controls or
management overriding existing safeguards.
One important precaution is segregation of duties. For example,
the employee responsible for approving purchases shouldn't also have
unrestricted authority to establish vendors, process invoices and authorize
payments. Dividing these responsibilities makes it more difficult for one
person to carry out and conceal fraudulent transactions. Manufacturers should
also consider conducting regular inventory reconciliations, verifying changes
to vendor information, and requiring independent reviews of significant purchases
and payments.
The ACFE identified several controls associated with
substantially lower fraud losses. Organizations with management reviews had
median losses 55% lower than those without. Proactive data monitoring and
analysis were associated with a 53% reduction, while surprise audits were
associated with a 50% reduction.
Encourage employees to speak up
Tips uncovered 43% of the fraud cases examined in the ACFE's
2026 report, making them the most common detection method. More than half of
those tips came from employees who often recognize suspicious behavior before
management becomes aware of a problem. Manufacturers can encourage reporting by
establishing confidential reporting channels, communicating their availability
and maintaining policies that prohibit retaliation against individuals who
raise concerns in good faith.
The ACFE recommends combining fraud training with a formal
reporting mechanism to increase the likelihood that your organization will
receive fraud tips. Respondents without a reporting mechanism or formal
training program incurred a median loss of $175,000. By comparison,
organizations with both controls in place reported a median loss of $85,000.
Having both controls also reduced the duration of fraud schemes by 40%.
Take a proactive approach
Occupational fraud can affect manufacturers of any size. Review
your existing controls and address vulnerabilities before problems develop.
Doing so can better protect your assets and financial performance. Contact us
to discuss your business's fraud risks and strategies for strengthening its
defenses.
