As the economy continues to falter, businesses are vulnerable to an increased risk of fraudulent activities. All fraud is committed with the belief that the crime will go undetected. Therefore, companies cannot afford to simply ignore their exposure to potential fraud.
Companies must be proactive and make fraud risk management a priority. By setting a positive, anti-fraud tone at the top and by clearly defining and communicating anti-fraud roles and responsibilities, management can help to deter fraud within the organization.
History tells us that as corporate growth and output falls, fraud inevitably rises.
Several factors contribute to this heightened risk of fraud. Individuals are likely to feel increased personal and/or organizational pressures to do more with less. For example, individuals may begin to rationalize theft or other beneficial fraud to compensate themselves for lost income due to a salary reduction caused by the COVID-19 pandemic. Or, when pressures to meet estimated earnings intensify, a financial manager may be persuaded to inflate revenues at period end to earn bonuses.
Organizational changes necessitated by economic conditions may facilitate and/or open up new opportunities for fraud. For example, downsizing may lead to breakdowns within the system of internal control (i.e. decreased segregation of duties, reduced monitoring/review, etc.).
Business owners may have the perception that internal controls are not essential to running their business and therefore can be eliminated, especially in a period of economic downturn. Effective internal controls are, in fact, vital to an organization’s wellbeing. Lack of internal control creates a business environment that is ripe for potential fraud—this may result in lost profits, loss of reputation, and other detriments to the organization. The cost of a single fraud can far exceed the cost of implementing basic control measures.
Given the strong correlation between the economic environment and fraud risks, companies must be more vigilant now than ever to protect and safeguard their assets.
Recommended practices that companies can employ to reduce exposure to fraud include the following:
- Reassess your company’s risk for fraud in light of current business and economic conditions.
A fraud risk assessment addresses the key areas of your organization to consider exposures to internal and external fraud. This assessment includes consideration of the severity/impact of a particular risk as well as the likelihood of occurrence. Remember that history tells us the likelihood of fraud increases in times of economic hardship.
The fraud risk assessment effort helps you to understand what controls are in place to deter fraud in each key area and alert management quickly if fraudulent activity may have occurred. Organizational changes can have a significant impact on the organization’s exposure to fraud. Therefore, the organization’s control environment should be reassessed periodically to determine if there are gaps that need to be addressed to reduce the threat of fraud.
- Reassess your company’s fraud deterrence plan.
Are anti-fraud roles and responsibilities aligned with your company’s fraud risk assessment? While it will never be possible to completely eliminate the possibility of fraud, management can be proactive in targeting key risk areas to limit the organization’s exposure. Because industries and organizations differ, a fraud deterrence plan needs to be tailored to your particular organization and the unique set of risks you face. This will allow you to address your fraud exposure in the most cost-effective way.
- Establishing and maintaining an accessible and confidential whistleblower hotline.
For a whistleblower hotline to be effective, it is critical that policies are in place to protect an employee from retribution if he or she makes a report in good faith. Establishing a process to deal with the incoming tips on the front-end is also imperative—this builds trust and confidence that fraud reports will be handled appropriately and in a timely manner.
- Continuing fraud awareness through regular training.
By promoting fraud awareness among your employees, customers and vendors, you can enlist the help of all of your business partners to combat fraud. Educating employees through ongoing training sessions is an important component of a fraud prevention program. Employees who see themselves as an integral part of the internal control system are more likely to report fraud. Customers can also be involved through techniques like advertising the fraud hotline on the bottom of your invoices.
- Monitoring business operations and the effectiveness of internal controls.
Employees who know that operations are actively being monitored are less likely to commit fraud. Ensure that your fraud awareness program is not just a matter of words—back it up with actions and conduct periodic fraud monitoring.