A Mask Won’t Protect Your Company From Heightened Fraud Risks

Internal fraud can happen anywhere, anytime. Often it’s right under your nose, and may be perpetrated by your most trusted employees. But right now, the combination of circumstances makes it more likely than ever that your staff is experiencing the three factors in what forensic investigators call the fraud triangle: pressure, opportunity, and rationalization. According to the Association of Certified Fraud Examiners, “In times of economic crisis, employees’ personal financial pressures tend to rise, which is often where the decision to steal from an employer begins.”

It’s more likely, given the current economy, that someone inside your company will feel pressure. Maybe you’ve had to cut his hours, or she’s worried she’ll be the next one you let go. Perhaps their spouse has been laid off and they’re in financial trouble. In many cases there’s more opportunity – remote working eliminates immediate oversight, and internal controls may have been relaxed. These factors can easily combine with the third one – rationalization. The boss is ordering meals from the best restaurants, an employee may think, but I might not be able to make my rent this month. Or I deserve it. Or I will pay it back.

That’s how fraud starts – and it costs companies billions each year.

When I teach workshops, I ask business leaders to think about their own firms. If they were employees, how would they steal from their own companies? It’s amazing what they uncover. Inflating expense accounts…colluding with vendors…directing funds to family members. And conditions are ripe for fraud now. It’s more difficult, for example, to use one of the most common internal controls, segregation of duties. And mandatory vacations may be hard to enforce. As you coped with conditions of the pandemic, did you eliminate some people, and open your business up to fraud?

Here are a few places you should be looking to discover what might be going on in your company.

1. Vendor due diligence

   In many industries, supply chain is disrupted. Would it be possible for someone in purchasing to create a new vendor to replace one that can’t deliver? What due diligence is currently in place to make sure that “vendor” isn’t a family member or personal account? Review your vendors and make sure you know them all.

2. Vendor kickbacks

   The supply chain is also vulnerable in the general course of business. Are costs going up for certain items? In this economy many prices have changed, so you might accept a 2 cent increase for a specific widget, without too much question. But if that widget used to cost 10 cents, your purchasing agent might be committing collusion – raising the price to 12 cents, and splitting the difference with the vendor. Look at items that recently increased in cost, and confirm that it’s a legitimate increase. And don’t forget about products that have decreased in cost within the market but your costs for those items have remained the same. Why? Is your purchasing agent colluding with a vendor to not lower the price to market, but split the difference with the vendor?

3. Billing Fraud

   Lots of people are working remotely; many companies have changed addresses. And nearly all communication is digital, so your customers may be used to receiving their invoices by email. What if some of them got a letter saying you’d changed addresses or changed banks, with new instructions on how and where to pay? How long would it take you to notice (particularly if some customers are having trouble paying timely) that some of your payments aren’t arriving? Spot check customers who haven’t paid, to make sure they don’t think they have.

4. Expense Reimbursement Schemes

   How transparent is your business development process, when no one is in the office? How hard would it be for one of your sales team to create a fictitious lead, and spend a lot of money “pursuing it,” but really spend those dollars on herself, her family or a friend? Take a look at your sales team’s activities and learn more about the “big fish” they’re pursuing.

The ACFE’s report from last year showed that companies of all sizes in all industries experience fraud. Our infographic shows some of the biggest risks. How are you protecting your company?