Coronavirus Pandemic Is a Perfect Storm for Fraud

 

 


By Bruce Dorris, J.D, CFE, CPA
President and CEO of the Association of Certified Fraud Examiners

If you have lived long enough, you have been affected by some unforeseen calamity. Whether it be a natural disaster, destabilizing economic downturn or terroristic action, there has been an event that has caused a massive disruption in day-to-day life for not only you, but your community, country or the world. I witnessed it first-hand in my home state of Louisiana in the aftermath of Hurricane Katrina.

The COVID-19 pandemic is unprecedented in many ways for our lifetime. We are seeing its impact on individual lives, governments and the global economy. While cities and countries are scrambling to contain the virus and protect their citizens, they are also watching global markets decline at a breakneck speed. As the president and CEO of the Association of Certified Fraud Examiners (ACFE), the world's largest anti-fraud organization, I unfortunately can tell you that the looming economic downturn we can expect to see has a number of long-lasting implications. One important one being an explosion of fraud in the coming years — and organizations need to brace themselves.

After the 2008 recession, the ACFE surveyed hundreds of anti-fraud professionals to see what, if any, impact the economic crisis had on fraud in their organizations. The majority of respondents said they experienced an observable increase in the number of frauds, and 80% said they believe fraud levels increase in times of economic distress. With the current historic drops in markets around the world due to the coronavirus pandemic, many of the factors that were present then are likely to apply today.

There are a number of reasons fraud proliferates during recessions and times of economic instability. A large factor is the increased pressure companies and their employees feel as they struggle to meet the challenges of a down economy. For example, struggling companies can face pressure to falsify their financials in order to meet earnings targets or secure financing. Financial statement fraud happens to be the costliest type of fraud too; according to data from our 2019 Global Fraud Survey, financial statement fraud costs an average of $8.7 million.

Pressure from an economic crisis also affects a company’s employees and can make the company itself a target. 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. In times of economic crisis, employees’ personal financial pressures tend to rise, which is often where the decision to steal from an employer begins. Data from our 2019 survey indicates that 42% of occupational fraudsters are living beyond their means at the time they commit fraud, and 26% are experiencing financial difficulties. These are the two most common behavioral red flags for these crimes.

The second element of the Fraud Triangle — opportunity — can also be exacerbated during hard financial times. Companies seeking to cut costs often target non-revenue-generating departments like compliance and internal audit. This is a mistake. Cutbacks to departments or initiatives that are integral to a comprehensive anti-fraud program only serve to leave organizations more vulnerable to the growing likelihood of fraud. As organizations make cuts in the attempt to operate with a leaner staff, they can find themselves caught in a perfect storm for fraud: pressures motivating employee fraud are high at the same time that defenses intended to safeguard against fraud have been weakened.

During the recession, we can expect not only more fraud to occur, but also more existing fraud to be discovered. As Warren Buffett said, “You only find out who is swimming naked when the tide goes out.” Frauds that might be concealed for months or years suddenly are revealed when cash flows dry up and fraudsters are no longer able to cover up the money they have stolen. The most famous example of this was Bernie Madoff’s Ponzi scheme, which came to light as a result of the 2008 recession.

Madoff was only one man, but the damage his fraud caused was catastrophic to thousands of people. On a human level, it led to suicides and people losing their life savings. On a larger scale, it led to organizations going bankrupt, which further destabilized important parts of industries. As we watch the tide go out as revenues dry up due to the reverberations of the coronavirus pandemic, how many more fraud schemes will come to light?

While these predictions may seem dire, organizations can put protections in place now to try and soften the blow from fraud. During cutbacks, it’s important to maintain anti-fraud resources and staff. The ACFE’s Report to the Nations shows that the typical organization loses 5% of its revenue to fraud and abuse, so removing anti-fraud programs may cost more money than it saves. Our data from the 2019 ACFE Global Fraud Survey, which will be published in April in the 2020 Report to the Nations, also shows that organizations that failed to invest in internal controls had significantly higher fraud losses and took longer to detect frauds than those who had targeted anti-fraud measures in place. More than half of all occupational frauds occurred because of an internal control deficiency. Therefore, I can confidently say that now is the time for organizations to be bolstering their internal controls, not cutting them.

I know the world is still in turmoil as we try and figure out how to respond to this unprecedented event. Hard decisions are being made every day by governments, medical professionals, companies and individuals. The dust will not settle for a long time, and we will continue to feel ripple effects in all areas of life for years to come. And although business practices may not be top of the mind right now while we face these difficult changes, I encourage organizations to look towards the future to protect themselves, and their employees, against fraud. Because it’s not a question of if we see more fraud, it’s a question now of how much we will see.

Contact the ACFE
For more information, email PR@ACFE.com.