Fraud is increasingly a topic in our conversations. We have had direct experience with EHS fraud in the past. The most recent occurrence was helping a client unravel an embezzlement scheme using waste disposal as the fraud mechanism. It played out a bit like a made-for-TV movie – not the kind of thing I ever expected to see personally, nor in the 21st century.
New pressures and risks are developing around sustainability/CSR reporting. Although still largely voluntary (certain aspects are mandated in the US, UK and Australia for instance), its business importance has grown dramatically in the past 5 years.
Customers demand more transparency and reporting in their supply chains, and many make procurement decisions based on this information. Many institutional and activist investors carefully review sustainability/CSR disclosures and make decisions using that information. It is now common for shareholder resolutions to be filed related to the disclosures, or lack thereof. Major media outlets have sustainability/CSR desks specifically focused on these matters and who pore over the filings and report on them.
We are finding that there is very little consideration given to fraud assessment or monitoring in this context – so is it even meaningful? We think so, and well known fraud and compliance expert Hui Chen agrees. Let’s apply the Fraud Triangle to supplier CSR performance.
- Motivation. There is much on the line for businesses and their suppliers in terms of CSR results. As pointed out above, sustainability/CSR disclosures and performance may directly impact revenues, reputation and investor activity. No one wants to be on the wrong end of that. Motivation? Check.
- Rationalization. It isn’t much of a stretch to see how an individual can rationalize using alternative facts due to the business pressures. In some cases, suppliers in developing countries may rationalize their actions further due to their own cultural setting. But let’s not kid ourselves into thinking that the US is immune itself.
- Opportunity. There is ample opportunity for motivated suppliers to commit fraud. In some instances, CSR auditors are used to review suppliers. But those hiring audit firms many times severely limit the auditors by imposing minimal scope/effort driven primarily by cost. Suppliers know their customers’ auditors are not enabled to conduct a thorough review, and with pre-scheduled site visits, they have plenty of notice to dress the place up for the auditors.
This is only one example of how fraud can enter into the sustainability/CSR picture. If this isn’t included in your company risk assessments, or considered in the context of CSR/sustainability reporting, it should be.