Product quality compliance

In the manufacturing industry, nothing is more important than delivering high-quality products to your customers. But unfortunately, quality inspection fraud is on the rise. Recently disclosed incidents include the illegal acquisition of inspectors’ qualifications, non-compliance with statutory quality standards in the manufacturing process and data falsification. Figure 1 below shows the number of quality fraud incidents by year from 2015 to 2020, based on timely disclosure information from listed companies in Japan.

In particular, 2017 and 2018 stand out as having a comparatively large number of incidents. This shows that quality fraud was a frequently occurring problem in the manufacturing industry during those two years.

Figure 1: Number of quality fraud incidents based on timely disclosure information from listed companies in Japan (2015-2020)

Figure 2 shows the number of occurrences of the term ‘品質不正’ (‘product quality fraud’) in corporate disclosure documents. The fact that this term is explicitly used in corporate disclosure documents such as securities reports and corporate social responsibility (CSR) reports also suggests that in addition to previously recognised types of fraud such as accounting fraud, bribery and violations of competition laws, companies are becoming more aware of the risk of product quality fraud.

Figure 2: Occurrences of the phrase ‘product quality fraud’ in corporate disclosure documents (number of documents in which the phrase occurred) (2015-2020)

PwC's services

Our forensic services team has been involved in numerous quality fraud investigations to date, where we have helped clarify the facts and investigate the causes of fraud. By using the knowledge and experience we have accumulated through these investigations, we provide services tailored to your actual circumstances and needs, including quality fraud prevention services and quality fraud audits.

Figure 3: Examples of services related to product quality compliance

Product quality compliance reviews

Reviews of investigation reports of past quality fraud incidents often reveal that the root causes of these incidents lie in insufficient and ineffective internal audits.

Awareness of this issue has led to more and more companies using objective third-party reviews of their internal quality management audits and their entire quality audit system. With our knowledge and experience in conducting investigations and quality audits in a variety of fields, PwC’s forensic services team can help you review your quality compliance system and detect issues from a company-wide perspective.

Figure 4: Our product quality compliance review

Advice regarding product quality audits conducted by quality assurance departments

Product quality audits are generally aimed at confirming whether a plant’s internal quality management system (QMS) is properly established and operated. They also tend to focus on deviations from the QMS caused by unintentional errors—in other words, mistakes—and often do not take into account intentional fraud. However, many recent quality fraud incidents involve the falsification of information during the manufacturing and inspection processes. It can be difficult to detect this kind of fraud by using conventional plant audits, because various data and materials created within in the plant can be modified on the surface to prevent the fraud from being discovered.

Considering the recent rise in quality fraud incidents, we believe that introducing additional audit procedures based on the perspective of fraud risk will lead to improvements in the quality of plant audits. When conducting quality audits based on the perspective of fraud risk, it is important to create process maps for the manufacturing and inspection processes and examine whether any ‘opportunities’ for fraud might exist. By then focusing audit resources on items that represent important quality risks, based on a ‘risk approach’, and taking into account the manufacturing and inspection environments, product characteristics and other factors, we can conduct an effective and efficient audit.

Using this concept of a ‘risk approach’ that we have cultivated through years of fraud investigations and fraud prevention support, our forensic services professionals can help you improve efficiency by reviewing your quality audit items and implementation procedures, and by providing support for more effective audits from the perspective of fraud prevention.

Figure 5: Process map and risk example for product inspection process

Support for improving quality audits through data management and analysis

Many organisations have made some progress in digitalising information and data related to quality compliance—for example, by introducing integrated systems. However, we also see cases where this information is managed by specific individuals, resulting in scattered data. When this occurs, more labour hours are required to take stock of related information and to organise relationships and quality risks when an incident of quality fraud is discovered. This leads to concerns that the investigation period will be extended, resulting in delays in reporting to regulatory authorities and customers.

When an incident of quality fraud occurs, detailed disclosure is required. This makes the unification of data management and the sorting of day-to-day quality data major elements of risk management. PwC’s forensic services team leverages our extensive experience in quality fraud investigations to help you set up data maps for the mapping of inspection processes and organisation of risks.

By setting up a data map, you can comprehensively visualise your internal information and use data efficiently and effectively to monitor quality control, quality audits and more. By incorporating not only quality-related data, but also access logs and other log data in your analysis, you can expect to obtain more objective and multifaceted analysis results.

Figure 6: Sample data map

Our team

Takuei Maruyama

Partner, PricewaterhouseCoopers Aarata LLC, PwC Business Assurance LLC

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Ryusuke Nara

Director, PwC Advisory LLC

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Shunsuke Ueno

Director, PwC Advisory LLC

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