During times of economic downturn or recession, it’s possible to see an increase in employee fraud. It’s important that those charged with governance take the lead to address ethical issues within the organization and demonstrate an emphasis on mitigating fraud.
A fraud risk strategy should be developed to address exposure areas, while still enabling the organization to function efficiently. Every organization will operate according to their conventions, but all should include a strategy that is owned by senior leadership and includes action by individuals from across the organization.
Following are explanations of how fraud arises during times of disruption and strategies to help mitigate risk.
Three Conditions for Fraud
The fraud triangle, which was created by criminologist Donald Cressey, describes three conditions that increase the likelihood of fraud occurring:
- Individuals engaging in fraudulent activity will experience some pressure to act.
- There must be an opportunity to allow the act to occur.
- The individual will often try to rationalize their actions.
As individuals find themselves in uncertain situations during the Covid-19 pandemic, whether it be facing a personal financial struggle due to reduced pay, a spouse losing their job, or desire to help the organization succeed during hard times, the pressure to take advantage of an opportunity can be felt much more strongly. This can lead to unethical behavior.
A whistleblower hotline is a valuable tool used to gather feedback from those closest to the action. Creating a hotline can provide employees or external individuals with an anonymous opportunity to share concerns of unethical behavior.
Opportunity to Commit Fraud
Despite many organizations regularly working to ensure strong internal controls, during times of change, internal processes and controls may not be reviewed or revised as quickly as change occurs. During the COVID-19 pandemic, many companies converted most of their workforce to a remote working environment, or furloughed a portion of their workforce. This is a significant change that required people and organizations to act quickly with little time to prepare or reflect.
Changes in process to allow employees to complete their work remotely may have impacted the regular cadence of internal controls or review. Additionally, when there are workforce reductions, or holds in hiring, it creates gaps within processes. This requires those who are still working to take on additional tasks and responsibilities. While moving quickly can allow businesses to continue to operate under shifting circumstances, it can result system access being granted without appropriate evaluation of the impact to segregation of duties. Due to both increased responsibilities and system access, it may become easier for employees to exploit deficiencies.
Changes to business strategy and process without adequate evaluation are the biggest factors in creating opportunities for fraud to occur.
The likelihood of unintentionally exposing the organization to increased fraud or error is high in these rapidly changing environments. Understanding how routine activities may have been altered to adapt to these changes and assessing their impact on the organization’s risk exposure can be a simple yet critical task. If your company switched to working from home or reduced its workforce during COVID-19, consider implementing a process and control task force to evaluate the process changes that the switch might have introduced.
In challenging economic times, it’s likely that individuals will more quickly rationalize fraud and therefore commit it.
During an economic downturn, rationalization may include thoughts such as, “The company will be fine, but I need to support my family for the next few months,” or, “I’ll just bend the rules so that my quarter-end results will still ensure I receive a bonus.” A number of people in today’s workforce are experiencing pay or salary reductions and may feel entitled to extra compensation for a variety of reasons.
Organizations should review their policies and procedures to verify that they’re communicating the importance of ethics and that there’s no tolerance for unethical behavior.
In addition, requiring employees to sign a code of conduct helps ensure that employees agree to adhere to a standard of ethics. Companies can also enforce a fraud policy and engage a fraud response team to discourage fraudulent behavior.
We’re Here to Help
To learn more about how you can improve your fraud risk program, contact your Moss Adams professional.
For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: