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The Perfect Storm for Fraud

Since the start of the pandemic in March 2020, many companies are operating in a different manner and environment than their historical norm. Our new normal consists of businesses that quickly moved from an office environment to home office work stations with employee discussions using new tools like Zoom to facilitate a connection to the outside world. Companies had to change quickly to try to keep some type of operation going which meant a lot of process changes.  Although these changes were done to try to safeguard operations, the changes may have opened up another opportunity for a threat was is always present in the business world: Fraud – the intentional deception by an employee on a company to effect financial or personal gain. If you think it can’t happen to your business, think again. According to a 2012 study by the Association of Certified Fraud Examiners, about 31.8% of businesses have been a victim of some level of fraud.  

Fraud is the function of three key factors that contribute to its execution: 

  1. Pressure – this refers to a financial stress on an employee where they need financial gain to satisfy a need. This could be due to debts, lifestyle costs or addictions to name a few and are likely elevated in an economic crisis where the family unit may experience a reduction in income due to layoffs or reduced hours. 
  1. Rationalization – this is the person’s reasoning for why they are doing the fraud. Many times the fraudster will rationalize the act to themselves based on justifications like “I deserve it” or “I’m just taking a loan and I’ll repay it next month and no one will know”.  
  1. Opportunity – This is the key risk area for a business since the employee has the ability to carry out the fraud without any preventive measures. In the Covid19 era, this is a huge risk since the sudden change in work environments and processes have potentially opened up areas of control weaknesses providing opportunities for people to commit fraud. 

So what’s the solution? It’s your control environment – the system of checks and balances in organizations to reduce the threat and effect of fraud and errors. All well-managed companies have internal controls in place to manage fraud and likely these systems have been operating for years but, as your business moved to a remote work environment, did your control environment adjust accordingly? It may have in some instances but not necessarily across the organization in all relevant areas. As a result, it is important that you review your processes and controls to ensure that they are functioning as you designed them to do and are providing an adequate level of oversight. In addition to that, look at new systems and processes that have been put in place due to the pandemic to ensure those systems have the proper controls in place and then take a high-level overview look at your organization to ensure that you are properly covered.  

It is almost impossible to completely guard against the effect of fraud because the perpetrators are creative and sometimes use common social conventions to assist them in their activities. A good control environment will reduce the risk of their success which is what you want in your business. Every business is a target for fraud but you don’t want to be an easy one. 

As CPA’s, we work with businesses to help them establish and test their controls. If you want to discuss your control environment, reach out to us and let’s start a conversation. 

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