Warranty fraud a growing threat for vendors

Vendors risk losing out on substantial amounts of revenue by failing to clamp down on warranty and service abuse perpetrated by end-users and the channel, a study has found.

Warranty and service abuse remains a relatively unknown issue in the industry, but research carried out by the Alliance for Gray Market and Counterfeit Abatement (AGMA) and PricewaterhouseCoopers (PwC) suggests it is a growing problem that threatens to impose a significant financial drain on vendors.

The study estimates that warranty and service fraud costs vendors between 3% and 5% in revenue alone.

Prevalent forms of warranty and service abuse include exploitation of replacement and RMA programmes, service over-usage, non-existent service charges, and other contract abuses.

An overwhelming 87% of respondents to AGMA's survey said that partners and resellers were the biggest culprits of warranty fraud, followed by small and commercial customers and petty criminals.

Ram Manchi, president at AGMA, said the study exposed the magnitude of an issue that has been "flying under the radar" of many IT suppliers.

Losses resulting from the exploitation of service entitlements can be reduced by establishing appropriate vigilance and controls, according to Jonathan Kurtz, director of internal audit and contract compliance services at PwC.

"In order for a company to protect itself from the threat of warranty and service abuse, it is important to understand who may be abusing warranty and service programmes, and how," said Kurtz. "Once these sources are identified, controls can be implemented to reduce vulnerability."