In hard times, fraud litigators tend to receive an increase in calls from clients who believe they are the victim of fraud.
Ten years ago, during the 2008–2009 economic recession, the Association of Certified Fraud Examiners (“ACFE”) released a study of the impact of an economic recession concluding that the financial pressures of the economic crisis led to an increase in fraud.
One of the reasons for the increasing incidence of fraud in recessionary times may be that middle management, often the first line of defence for detecting fraud, are quite often the first to be laid off during an economic slowdown.
Commenting on the United Kingdom’s last recession in the early 1990s, Hitesh Patel, fraud-investigation partner at KPMG in London, noted that, “when that layer’s removed, you’ve eroded your internal processes which are there to control fraud or misconduct,” amounting to a “change to business strategy, without a change to the business process.”
A financial slump also prompts would-be fraudsters to rationalize such behavior. According to a survey published by British insurer RSA, 3 per cent of adult Britons said hard economic times made committing insurance fraud more acceptable.
But there are other reasons for this surge in reports of fraud; hard times not only fuel fraud, they also spur businesses to conduct detailed reviews of their own operations leading them to discover past or ongoing deceptions. As recessions tighten, employees nervous about their own jobs may even blow the whistle on others increasing the incidence of fraud-related cases.
While businesses don’t have much control over an employee’s rationale to commit fraud, they can take steps to reduce risk during hard times. For example, businesses of any size should ensure that:
- Cheques for expenses over a certain amount (say $5,000) require the review and signature of two managers; and that
- The same individual is not assigned to handle both billing and expenses; or deposits and the books and records.
A lack of basic internal controls can make any business vulnerable.
Business owners often don’t believe that an employee could have defrauded them. Clients often say that they have a small, trusted group; that their bookkeeper has been with them for many years and was thought to be above reproach; or that they consider their employees to be like family members.
My first step in many fraud matters is often assisting the client get over the shock of discovering that a trusted employee(s) had stolen large amounts from them over many years.
How to prevent fraud within a business
Strong internal controls remain among the best ways to reduce the risk of fraud. Also, make sure to:
- Separate duties – never have one person handle the bookkeeping while also giving them control over business accounts.
- Provide oversight.
- Review bank statements each month.
- Consider setting up an anonymous tip line or a locked “suggestion box” where employees can anonymously report fraud.
- Schedule high-profile external audits and inform all employees and managers that they are intended to root out fraud as well as ensure the business is running smoothly.
Fraud litigators can suggest a course of action to help your business minimize damage and maximize your chances of recovering lost funds by gathering evidence, tracing funds, taking necessary legal action and advising on any third parties that may be held liable.