Predicting the unpredictable: Protecting aerospace & defense companies against fraud, reputation and misconduct risk

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This white paper provides step-by-step guidance to aerospace and defense companies on how to develop an effective antifraud program, which goes beyond financial statement risk to cover such areas as reputation, operational, legal and strategic risks. While it may not be possible to eliminate the risk of fraud altogether, with proper planning, policies and procedures, a company can at least identify it early and minimize its damage. Furthermore, the aerospace and defense industry is unique in that the programs are large, competition is high, and the compliance area is complex with significant penalties for non-compliance, creating additional incentives and pressures that can lead to fraud.

The white paper identifies six categories of fraud with common schemes impacting the aerospace and defense sector in each:

• Unauthorized receipts and expenditures is a significant category and includes actions such as improper payment to government officials and improper product component substitutions.
• Financial statement manipulation, another pervasive fraud risk category, includes intentional manipulation of cost estimates, overstatement of trade and unbilled receivables.
• Misappropriation of assets affects operational risk rather than financial reporting risk and includes industrial espionage activities such as violation of Export Administration Regulations and International Traffic in Arms Regulation.
• Disclosure fraud includes omission or misstatement of company size, use of domestic products and payments to influence federal transactions. Failure to make proper disclosures may result in bid protests or contract terminations.
• Aiding and abetting.
• Fraud by senior management.

The white paper also outlines five key steps that aerospace and defense companies can take to develop an effective antifraud campaign:

• Establish a baseline to assess existing antifraud programs and controls and develop a remediation plan.
• Conduct a fraud risk assessment.
• Evaluate design and validate operating effectiveness.
• Address residual financial reporting fraud risks.
• Standardize processes for incident investigation and remediation.

Fraud management makes good business sense. Companies that establish effective antifraud programs will go a long way toward helping to maintain or restore investor confidence in the integrity of a company’s financial results. Equally important, reducing fraud will help a company reduce costs, improve profitability, protect its reputation and mitigate liability. We believe this report is a valuable blueprint to help aerospace and defense companies achieve these goals.

We look forward to discussing with you how PwC might be of help in addressing the issues highlighted in the report.

If you have any questions relating to this paper, please do not hesitate to contact Scott Thompson, US aerospace & defense leader, +1 (860) 240 2153, and Dave Oldham, Managing director, fraud risks & controls, +1 (646) 471 7474