As the saying goes – desperate times call for desperate measures. It is certainly fair to say that many would call these desperate times. While companies turn their attention to survival and the safety of their employees and customers, it is a good time to remember the increased risk of fraud during an economic downturn. There are two reasons that we see an increase in fraud during an economic downturn:
1) People may have more pressures and motivation to commit fraud – COVID-19 creates the perfect storm for fraud. In the face of COVID-19 individuals are under an immense amount of pressure to keep food on the table, a roof over their heads, and keep their family healthy. With most companies working remotely and working with a leaner workforce, there is a perceived opportunity to commit fraud. Under these circumstances, it would not be particularly surprising that an individual could rationalize what they perceive as a legitimate reason to take or “borrow” funds from their employer. And there you have it – the fraud triangle with pressure, opportunity, and rationalization.
With that in mind, companies should carefully consider what positions are being eliminated, and what impact that may have on internal controls, and what new controls or procedures should be implemented during this pandemic.
2) Increased likelihood that a fraud will be discovered – As mentioned above, companies are cutting positions and looking for other ways to save while the economy works to recover. This results in management taking a closer look at the books and potentially uncovering something that would not have been uncovered in the ordinary course of business. This may not mean that more fraud is happening, just that it is being discovered because of the change in structure and processes.
While COVID-19 may be creating a perceived opportunity to commit fraud, it may also be taking away an opportunity. It is common for fraudsters to never take a vacation and to ensure that they are the only individual involved in the bookkeeping. However, COVID-19 has caused many companies to lay off a number of their employees and shift responsibilities in order to survive the current economic downturn. This creates an opportunity for the fraud to be uncovered by forcing the fraudster to turn over or share responsibilities with a new individual.
As businesses focus on survival and keeping the doors open, a worthwhile part of that process should be a consideration of fraud prevention, so as to avoid any additional suffering or avoidable harm. For your convenience, we’re pleased to provide additional thought leadership regarding common fraud red flags.
To discuss this information in detail, please contact Rebekah Smith or Mallory Ashbrook.
Article written by:
Mallory Ashbrook, CPA, CVA, JD
Senior Manager, Forensic & Dispute Advisory Services
