Monday, 25 August 2014

Defective Delivery frauds in organizations

Defective Delivery Fraud are committed by vendors


Defective delivery fraud involves the delivery of products or services that are inferior in some manner or were never ordered in the first place. The supplier or vendor

Steps in Defective Delivery Fraud

(1) intentionally causes the delivery to be defective;
(2) does not disclose the defect to the customer, and
(3) does not offer a corresponding decrease in price to compensate the customer for the defective products or services.

The products delivered may be short in quantity and/or inferior in quality to what was ordered. Defective delivery fraud is common and should be a regular target area for audit analysis.

Nature of Defective delivery fraud



Defective delivery fraud involves the substitution of lower quality items, lower quantities of materials, less-skilled labor, and/or fewer labor hours than agreed upon by an organization. The substitutions are made by the supplier or vendor without disclosure or agreement by the purchasing entity, and no price concessions are provided for the substitutions. The perpetrat- ing supplier or vendor profits from this scheme to the extent of the undisclosed reductions or substitutions that were made. Consequences beyond the financial implications may also result from these schemes. As an example, defective delivery fraud might involve a building contractor who cheats on the sand and cement mixture used in constructing bridges and buildings. The resulting concrete eventually crumbles, and the bridge or building collapses.

Sometimes Employees Involve in Defective Delivery Frauds


Many times collusion occurs between the supplier or vendor and a key employee of the victim. If the victim entity’s employee is dishonest and in collusion with the delivering vendor, then the delivering vendor has nothing to fear—unless, of course, someone independent is pro-actively looking for defective delivery fraud. A supplier or vendor may try to sneak one past the receiving employee and, if questioned, will likely claim an “honest mistake.” History has shown that most frauds start out small, effectively testing the waters, and that once failures in the internal controls are identified and the small fraud proceeds without detection or consequences, larger ones are likely to follow.

Remedial Plans: Design Internal Controls


Properly designed internal control systems require that a designated employee complete a receiving report certifying that a product or service was delivered in accordance with applicable purchase order or contract specifications prior to a vendor’s invoice being processed for payment. However, if the designated employee is complacent or negligent in performing this responsibility, a vendor or contractor may exploit the situation. Often, suppliers and vendors provide gifts or other benefits to the designated employee or lavishly entertain them. The payback to the supplier or vendor is often a perfunctory examination of incoming goods or services received by the employee. The amount, type, size, and frequency of gifts to a purchasing agent or individual designated to verify orders and services can be very telling about the relationship the employees have with their suppliers and vendors, a potential red flag for the company to take notice.

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