Covid 19 and the effects on Fraud Prevention

The COVID-19 outbreak continues to have a devastating impact across the globe. The numbers of infected people increase every hour, and in many countries, movement restrictions are becoming tighter, health systems are struggling, and the stock markets have experienced their worst weeks since the 2008 financial crisis.

After the 2008 recession, the ACFE surveyed hundreds of anti-fraud professionals to see what, if any, impact the economic crisis had on fraud in their organizations. The majority of respondents said they experienced an observable increase in the number of frauds, and 80% said they believe fraud levels increase in times of economic distress. With the current historic drops in markets around the world due to the coronavirus pandemic, many of the factors that were present then are likely to apply today.

It is not hard to see why the crisis might provide fertile ground for fraud. The combination of financial and health threats makes people more vulnerable and creates opportunities for fraudsters. In some countries it has already been reported that criminal gangs have started to target deserted commercial premises to steal goods and stock. How long will it be before some employees are guilty of misconduct?

There are a number of reasons fraud proliferates during recessions and times of economic instability. A large factor is the increased pressure companies and their employees feel as they struggle to meet the challenges of a down economy. For example, struggling companies can face pressure to falsify their financials in order to meet earnings targets or secure financing. Financial statement fraud happens to be the costliest type of fraud too; according to data from Association of certified fraud examiners 2019 Global Fraud Survey, financial statement fraud costs an average of $8.7 million.

Pressure from an economic crisis also affects a company’s employees and can make the company itself a target. The most commonly accepted model for explaining fraud in the workplace is theFraud Triangle, which states that three factors generally must be present in order for a person to begin committing occupational fraud— pressure, opportunity and rationalization. In times of economic crisis, employees’ personal financial pressures tend to rise, which is often where the decision to steal from an employer begins. Data from the 2019 survey indicates that 42% of occupational fraudsters are living beyond their means at the time they commit fraud, and 26% are experiencing financial difficulties. These are the two most common behavioral red flags for these crimes.

The second element of the Fraud Triangle — opportunity — can also be exacerbated during hard financial times. Companies seeking to cut costs often target non-revenue-generating departments like compliance and internal audit. This is a mistake. Cutbacks to departments or initiatives that are integral to a comprehensive anti-fraud program only serve to leave organizations more vulnerable to the growing likelihood of fraud. As organizations make cuts in the attempt to operate with a leaner staff, they can find themselves caught in a perfect storm for fraud: pressures motivating employee fraud are high at the same time that defenses intended to safeguard against fraud have been weakened.

Key pressure points in the new environment that increase the risk of fraud:

  1. Shift of resources

Business models are challenged and executives are more focused on operational measures than compliance and fighting fraud;

  • The temporary transfer of staff into operations may leave prevention functions understaffed;
  • Illness among the workforce and absences from work become an issue in terms of capacity and finding replacements to do the work;
  • Ongoing investigations are halted due to lack of resources and focus;
  • Budgets are reduced for any activity considered ‘non-essential’.
  1. Significant job cuts

In the current situation, every company is looking for savings, and one of the immediate measures is to cut jobs or reduce payments to employees. As experience has shown, for some employees this may create an incentive to commit fraud.

  1. Fast tracking new suppliers and other business partners (customers, suppliers, agents, intermediaries or other advisors)
  2. The risk of onboarding third parties which are not fully vetted and screened may result in working with disreputable or even restricted parties;
  3. Working with new agents/intermediaries, due either to closure of existing agents or inability to deliver the volume needed;
  4. The pressure of bringing products very quickly to market.

What questions should businesses be asking?

  1. New ways of working
  2. Is there still enough oversight and control over foreign operations?
  3. Are there any controls in place to prevent theft of data by employees working remotely?
  4. Do you carry out a reprioritization of the risks? Are key controls in place to mitigate them?
  5. Financial risks
  6. Is the company eligible for any of the government aid? Is there a risk that conditions for eligibility are partially fabricated?
  7. Is there still enough oversight over bank transfers and defined authorisation procedures?
  8. Internal and external risks
  9. Did you assess your reliance on third parties? Are there any that will not have capacity or bandwidth to deliver? If yes, would you have time for the normal vetting process before onboarding new third parties?
  10. Does the shift or reduction in resources increase the risk of physical misappropriation of assets?
  11. Did you include anyone from the compliance/legal/investigation team in the crisis response taskforce?

While these predictions may seem dire, organizations can put protections in place now to try and soften the blow from fraud. During cutbacks, it’s important to maintain anti-fraud resources and staff. The ACFE’s Report to the Nations shows that the typical organization loses 5% of its revenue to fraud and abuse, so removing anti-fraud programs may cost more money than it saves. The data from the 2019 ACFE Global Fraud Survey, which will be published in April in the 2020 Report to the Nations, also shows that organizations that failed to invest in internal controls had significantly higher fraud losses and took longer to detect frauds than those who had targeted anti-fraud measures in place. More than half of all occupational frauds occurred because of an internal control deficiency. Therefore, we can confidently say that now is the time for organizations to be bolstering their internal controls, not cutting them.

the world is still in turmoil as we try and figure out how to respond to this unprecedented event. Hard decisions are being made every day by governments, medical professionals, companies and individuals. The dust will not settle for a long time, and we will continue to feel ripple effects in all areas of life for years to come. And although business practices may not be top of the mind right now while we face these difficult changes, we encourage organizations to look towards the future to protect themselves, and their employees, against fraud.

This is an edited version of an article originally published by Association of Certified Fraud Examiners , 2020.