Fraud Perpetuation and Mitigation in the Current Times

Is an economic slowdown the best time for fraudsters to accomplish their objectives? Or is this the best time for organizations to enhance their fraud risk management frameworks? Or is this the best time for both?

Aakansha Singh, Senior Manager in the Forensic Practice of MGC Global Risk Advisory LLP, seeks to provide answers to these pertinent questions.

The COVID-19 pandemic is unprecedented and in an environment of relative uncertainty with the very source of their livelihood coming under threat, there is a higher tendency for fraudsters (which include individuals and organizations) to resort to dubious means for their sustenance.

With remote working and digitisation rising to levels that have never been witnessed before, cybercrime, information & IP theft, phishing attacks, payment fraud, concealment of information, misrepresentation, impersonation and other fraud schemes are on the rise and in fact are in itself a pandemic. Since the focus of organizations is largely on the survival and continuity of their businesses, there are specific elements where organizations may be dropping the guard.

 

Fraud Triangle – the perfect space!

The most commonly accepted model for explaining fraud in the workplace is the Fraud Triangle, which states that three factors generally must be present in order for a person to begin committing occupational fraud— pressure, opportunity and rationalization.

 

PRESSURE

In times of economic crisis, personal financial pressures tend to rise, which is often where the decision to steal from an employer or stakeholder/s may begin. External pressures (from the market, regulators, shareholders, financial institutions, promoters, etc.) and fitment for financial incentives for specific categories of organizations enhance the possibilities of accounting misstatements.

 

OPPORTUNITY

Opportunity is the second key component of the Fraud Triangle – and occurs when internal control deficiencies exist, which can be exploited, when processes or management oversight procedures are weak and when there is a low perceived risk of being caught. Organizations seeking avenues to cut costs often target functions that do not generate revenue such as finance, marketing, human resources, IT, compliances, internal audits & risk management. This may well be a mistake. Cutbacks to functions or initiatives that are integral to a comprehensive anti-fraud program will only serve to leave organizations more vulnerable to the growing likelihood of fraud.

 

RATIONALISATION

The final component of the Fraud Triangle is Rationalization, which relates to motivation. In a difficult economic environment, individuals may believe that improper conduct and actions are justified. Further, many of the largest frauds in history have been a result of misleading financial reporting, some of which has been rationalized with the belief that the modified results will be reversed in the future when the economy or a situation recovers or turns around. Being able to rationalize unlawful actions allows individuals to believe they are maintaining an ethical code and are justified in their actions.

 

An ounce of prevention…

Fraud risk cannot be completely eliminated and needs to be mitigated or managed. Organizations should focus on eliminating ‘Opportunity’ as they cannot completely control the other two components of the Fraud Triangle which are ‘Pressure’ and ‘Rationalization’. Fraud prevention has been the best method to curb corporate fraud as once the fraud is committed there is very less probability that organizations will be able to recover the complete loss.

Personal accountability, which is a vital tenet of governance comes into the forefront in fraud mitigation. In the current stage and the foreseeable future, it should be the shared responsibility of management and the board to define roles, responsibilities and authorities to make decisions and take action, while establishing the appropriate framework for reinforcing personal accountability.

The management assurance functions of companies and risk advisory services firms advising these companies need to identify sound corporate governance practices in relation to the industry. At the heart of their approach should be an identification of those areas that pose the greatest fraud risks, be they internal or external and then to manage them within acceptable constraints of a cost/benefit equation. A sound risk manager will ensure that you can spend less time worrying and more time concentrating on the matters that are important to the future of your business.

 

Author:

Aakansha is a chartered accountant with over 10 years of professional experience wherein she has served corporates with business interests across the globe, with a special focus in the manufacturing, service and technology industries. She is an Associate Member of the Association of Certified Fraud Examiners Texas, USA and also holds a degree in Law.

She has led several fraud investigations for reputed clients and has developed fraud risk management frameworks for organizations across the spectrum. Aakansha also has vast experience in conducting forensic audits, internal audits, assessment of internal financial controls and enterprise wide risk management assignments.