MANUFACTURING: Fraud against manufacturers continues to grow

Fraud against Michigan manufacturers is similar to that found against all businesses nationwide. It is a primary cause of business failure, and it’s growing!

According to U.S. Department of Commerce statistics, one third of all business failures relate to some form of fraudulent activity, many times, employee dishonesty. And even more sobering, is the answer to the question that cannot be answered: “How many businesses that survived the first five years of startup limp along financially or fail to reach their full profit potential because of the effects of internal and external frauds?”

Fraud facts relating to Michigan manufacturers

Employees account for the highest number of frauds committed against manufacturers, whether it be through insurance claims against a business, unauthorized time off, poor performance, etc. Cumulatively, these types of employee-related fraud account for the biggest losses experienced by manufacturers.

Managers and key employees of companies commit the highest dollar fraud loss per incidence. Key employees and managers are in the best positions to falsify statements (financial, credential, work-related or test-related) for personal gain.

External frauds committed by the vendors to and the competitors of manufacturers are less frequent. However, losses experienced are much more significant since many times they can affect brand identification and/or loss of market share in some way.

Fraud has been examined on a national scale by both those in government and those in the private sector interested in minimizing/eliminating it. In a recent Report to the Nation on Occupation Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE), it was concluded that the rate of internal and external fraud and abuse in American business likely will increase annually for the foreseeable future.

How to deal with fraud against manufacturers

A top down strategy establishing a standard of excellence and zero tolerance against fraud is critical, and management must “walk the walk.” Equally important is the effective communication of same.

To implement this top down strategy, business owners must:

? Establish an effective hiring process and provide a realistic budget to human resource departments for pre-employment screening. This is the first and most effective step to reducing all forms of internal fraud.

There must be effective checks and balances throughout the entire administration and operations process, whether it be at the line/floor level or in purchasing, sales, etc.

? A proactive approach against all forms of insurance claim fraud against the business must be instituted as part of the organizational process. Fraudulent claims must be exposed and vigorously defended on behalf of the company.

? An effective program to deal with external fraud is best developed through the education of key employees. Further, an effective competitive intelligence program, which gathers and analyzes information about competitors and projects courses of action to grow market share within the industry, is critical to executive decision-making and a marketing strategy.

Case studies

Qualified private detectives in Michigan provide investigative services to many Michigan businesses on a variety of fraud issues, whether they relate to suspicious insurance claims, product liability matters, competitive intelligence gathering, or a variety of litigation issues relating to employees/customers/vendors.

Research North, Inc. has defended the interest of businesses over the last 20 years, and where cases have been brought to the most successful conclusions, the above-described processes have been adhered to. For instance:

Insurance fraud

In countless investigations relating to workers’ disability compensation matters, our private detectives were able to gather the most effective results when good record keeping and witness information was developed and provided by insureds prior to the onset of the investigation.

Internal theft

When there is not an effective internal process relating to money, product or information handling, problems eventually develop.

One example where investigation was successful, but time-consuming and thus costly to a manufacturer, includes the theft of proprietary information.

A complaint was received from a manufacturer after a newly-designed product, not yet in the production stage, was found on display by a competitor at a nationwide show.

Investigation found that a disgruntled key employee, who was fired nine months prior, had stolen the product designs from the company’s CAD system. At the time, no controls on this information existed.

Information developed during the course of the investigation was successfully used against the former employee and the competitor in a federal district court lawsuit. However, had effective information handling controls been in place, it is highly likely that the theft could never have occurred.

Product liability

Litigation may still be filed by plaintiffs seeking damages even with the best of quality control processes in place. In these cases, effective defenses oft times minimize the impact of a fraudulent claim.

For instance, our investigators were hired to develop information after a lawsuit was filed against a soft drink manufacturer/bottler when an 11-year-old northern Michigan youth purchased a soft drink and found a dead rodent inside the bottle along with the soft drink.

The rodent in the bottle was compelling evidence. However, a thorough investigation found that the claims of emotional harm were spurious. In the complaint against the manufacturer, it was alleged the youth’s emotional well being had changed, and he was unable to live his life normally. Investigation found that, in fact, the youth’s activities had not changed, and the evidence–the rodent in the bottle–was kept in the home during the entire course of the litigation (over a year-and-a-half), first on the mantel over the fireplace and then in the refrigerator. As a result, a reasonable settlement was reached prior to trial.


It’s estimated that fraud is draining over $400 billion from American businesses annually, and some believe that it’s growing at an annual rate approaching 10 percent. Begin immediately to look at your company’s process from the top down and commit to the proactive approaches described above. The bottom line on your financials will positively reflect this commitment!

Charlie W. Rettstadt is a certified fraud examiner and licensed insurance adjuster. He founded Research North, Inc. (RNI) in 1981. In Michigan, RNI has offices in Detroit, Lansing, Traverse City, Petoskey, Alpena and Marquette. He is currently writing a book on business fraud, to be published this year. BN