The Covid-19 Pandemic and Occupational Fraud; how to reduce risks

December 21, 2021

What is occupational fraud?

According to the Association of Certified Fraud Examiners (“ACFE”), occupational frauds are those in which an employee, manager, officer, or owner of an organisation commits fraud to the detriment of that organisation. This definition includes frauds categorized as corruption, asset misappropriation and fraudulent financial statements.

Ricardo Gamerof, Partner in Kreston Chile, examines the causes of fraud and how to mitigate them.

What is the relationship between economic crises and occupational fraud?

The sudden and widespread impact of the coronavirus pandemic and the measures to suspend the activities that were adopted to contain it have caused a drastic contraction of the world economy, which, according to the June 2020 edition of the World Bank’s World Economic Outlook report, will cause the worst recession since World War II and the first time since 1870 that so many economies would experience a decline in per capita output.

Furthermore, according to the British Broadcasting Corporation (“BBC”) there have been 14 major global economic crises in the last 150 years, with the coronavirus being the fourth-worst in the series. There is no doubt that the Covid-19 pandemic has caused a global economic crisis of great proportions.

To assess what we may be facing, we can look back to another great world economic crisis – the 2007/8 9 US subprime mortgage market collapse which led to various companies and banks having to be bailed out by central governments around the world. The International Monetary Fund (“IMF”) described it as “the most serious economic and financial collapse since the Great Depression of the 1930s”.

In 2009, the ACFE published the results of a survey “Occupational fraud: A study of the impact of an economic recession.” The findings of this study were revealing and of particular importance for our analysis:

• The level of fraud increased since the beginning of the economic crisis. More than half of the respondents indicated that the number of frauds increased during the previous year. Additionally, 49 percent observed an increase in the dollar amount lost to fraud during the same period.

• The increase in fraud stemmed from the intense pressure faced by so many individuals. Nearly half of the respondents stated that it was the increased financial strain pressure that resulted in the amplified level of fraud.

• Employees posed the greatest threat to organizational resources. More than 48 percent of the participants indicated that employee embezzlement rose, making this the most cited category. However, frauds by vendors, financial statement fraud, and corruption were also indicated to have increased.

In summary, the ACFE concluded that it is logical to assume that the rate of fraud increases when the economy weakens, and that fraud and economic strength are inversely related.

Is there a link between occupational fraud and Covid?

According to a recent survey carried out this year by the ACFE, 51% of organizations have uncovered more fraud since the onset of the pandemic, and 71% of respondents expect the level of fraud impacting their organizations to increase over the next year.

If, as the survey suggests, there is a strong correlation between large scale economic crises, a drop in growth and a consequent rise in occupational fraud, what can companies and their management teams do to strengthen anti-fraud programmes and mitigate their losses?

Is post-pandemic occupation fraud a bigger problem than ever?

In 2021, the ACFE’s new survey – “The Next Normal: Preparing for a Post-Pandemic Fraud Landscape” – looking at the current and expected effects of Covid-19 on the fraud landscape, suggests not that much has changed in the last 11 years:

• 51% of organizations have uncovered more fraud since the onset of the pandemic.

• 71% of respondents expect the level of fraud impacting their organizations to increase over the next year.

• Most of the professionals surveyed expect increases in all types of fraud risks.

• More than 80% of organizations have implemented one or more changes to their anti-fraud programs in response to the pandemic.

• 38% of organizations increased their budgets for anti-fraud technology.

• Shifts in business operations and changing consumer behaviours are the top two factors expected to impact the fraud risk landscape in the coming year.

• The most common pandemic-related challenges facing anti-fraud programs are changes to investigative processes and changes in control/operating environment.

But not everything is lost. There is much that Directors can do to prevent and detect fraud, and at the end of the report the ACFE concludes that the pandemic has changed much about the business environment and operations, and anti-fraud programs must evolve along with them.

Is it possible to reduce the risk of fraud?

There is no doubt the Covid-19 pandemic has increased economic opportunities and pressures on the part of employees, which inevitably resulted in an increase in the number of fraud cases and related losses. Businesses have to be doubly cautious as not only is the economic environment potentially reducing corporate income by reducing its sales and margins, but they also stand to lose more because it fuels the rise of occupational fraud and its related losses.

But the evidence shows that a robust anti-fraud program, actively sponsored by the Board of Directors and senior management, that includes a comprehensive fraud risk assessment, controls designed to mitigate identified risks and a response plan that enables fraud to be quickly investigated and the culprits isolated, can and will make a huge difference to the bottom line.

What is an anti-fraud program?

Management is ultimately responsible for detecting, preventing and responding to fraud. An anti-fraud program, aligned with a company’s compliance framework, demonstrates that management is setting the proper “tone at the top” to address its fraud and compliance risks. An anti-fraud program will not provide full assurance against fraud, but it can help mitigate the risk of fraud by allowing management to identify and prioritize fraud risks and allocate resources to address them.

To successfully mitigate the impact of fraud, and reduce fraud-related losses, an effective anti-fraud program should include the following key elements:

• Setting the proper tone: code of ethics, code of conduct, fraud prevention policies, communication and training, whistle-blower hotline.

• Proactive: risk assessment, design and implementation of controls, control monitoring and fraud data analysis.

• Reactive: incident response plan, investigation and punishment.

What is an example of a fraud risk assessment in practice?

On a recent engagement for the Chilean National Oil Company (“ENAP”), to carry out a fraud risk assessment of the corporation and prepare a fraud risk dashboard using forensic data analysis, we analyzed numerous sources of information, conducted multiple interviews and surveys, and were able to identify the main fraud risks threatening the corporation and assess their likelihood of occurrence and potential impact. Using the latest IT tools, we created an automated dashboard that red flags patterns related to the key frauds identified.

There is also an inverse correlation between anti-fraud controls and the dollar value of losses related to fraud instances. According to the ACFE, for every anti-fraud control they examined, organizations that had controls in place experienced smaller fraud losses and detected frauds more quickly than organizations lacking those controls.

As a result, the Board of Directors and management now have a warning and indicator system that periodically assesses the potential presence of a problem or threat of fraud, allowing them to identify and prevent fraud early and so reduce losses.

Talk to us about creating your own anti-fraud programme.