‘Business unusual’ has created opportunity for fraud, and it’s going to get worse
The principles underlying the fraud triangle were first advanced in the 1950s and remain relevant today
A global recession was expected in 2020 before the world was hit by a pandemic the likes of which had not been seen in 100 years. The 2008 global financial crisis demonstrated that fraud thrives when attention is focused elsewhere.
The recent change to “business unusual” has created new vulnerabilities. In a bid to survive, businesses are incurring substantial costs in areas where they have no experience in assessing value or tracking consumption. Stories of government grants, relief or aid packages and emergency funds being fraudulently misused are prevalent. And it's going to get worse.
The principles underlying the fraud triangle were first advanced in the 1950s and remain relevant today. Put simply, three elements affect the risk of fraud occurring: opportunity — the internal control environment; means — the incentive/pressure that influences employee actions; and rationalisation — how employees justify unethical behaviour.
How has Covid-19 affected these three elements?
Opportunity: Working from home (or living at work) has created a host of new challenges. Management is distracted and existing internal controls and procedures are being compromised or disregarded due to practicalities and urgency. Remote logins and password sharing will increase technology fraud risk. Loss of revenue will result in budgets constraints and retrenchments.
This will mean reduced segregation of duties and less monitoring as nonessential staff are let go. Investigations are being conducted remotely, if at all. The temptation to perpetrate new frauds or bury non-Covid-19 related losses will be too much for some to resist.
Means (incentive/pressure): Millions of jobs have been lost for good and hundreds of millions are under serious threat. Most employees are capable of perpetrating fraudulent acts in certain circumstances. A lack of job security combined with limited bonus prospects and excessive financial commitments will push some over that ethical cliff. Managements are also under pressure to mitigate poor financial performance that would drive share prices down further. This will lead to fraudulent financial reporting.
Rationalisation: The mental distress that emanates from a gloomy economic landscape and poor future prospects may encourage some individuals to commit fraud. Employees and others may develop a grudge against the organisation and the world — “Covid-19 isn’t my fault but I’m being punished” is a thought that for some will justify unethical acts in “looking after number one”.
What to look out for
Bribery and corruption: Supply-chain disruptions inevitably lead to illicit payments to regulatory official and others that can facilitate preferential treatment, queue jumping and falsification of requirements.
Fraudulent third-party payments: Major fluctuations in areas of expenditure render comparisons with previous periods invalid. One-off and nontraditional costs are the new norm and may be exploited by opportunists.
Payroll fraud: Substantial and sudden changes in workforce numbers lend themselves to “ghost” employees, overpayments and diversion of funds.
Fraudulent financial reporting: As the crisis wreaks havoc in the financial markets some may take the opportunity to hide previous losses or manipulate financial results.
Statutory fraud: Government support schemes may offer rebates and conditional payouts that are not as visible as traditional receipts.
The internal control environment needs to be constantly re-assessed to see if it is performing its most basic functions, with particular emphasis on areas where positions have been eliminated and responsibilities have changed. Value assessments on one-off new and urgent expenditure should be performed regularly by an independent person. Fraud awareness messages should be reissued and fraud reporting mechanisms refreshed and re-emphasised.
In a nutshell, in these challenging times, organisations are more exposed than ever to fraud at all levels. They will pay an even higher price than the economic effects of the Covid 19 pandemic if fraud alertness and response is not prioritised.
• Tonge, a former partner in a Big Four auditing firm, is a forensic accountant with Tonge and Associates in Johannesburg.
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