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How will economic headwinds shape the fraud conversation through 2023?

How will economic headwinds shape the fraud conversation through 2023?

Synopsis
5 Minute Read

During Fraud Awareness Month, discover how economic pressures are shaping the fraud risk environment and learn how to reduce the risks to your business. Increased reliance on technology, automated workflows, and the possibility of an economic downturn have combined to create a breeding ground for fraud in the past three years and left many organizations vulnerable to new threats.

To reduce the risks to your business, conduct a fraud risk assessment, encourage whistleblowers to come forward, and increase management oversight. While you can never fully protect your business from fraud, these steps can help you reduce the financial and reputational risks to your organization.

National Leader, Forensics and Litigation Support

The business landscape has experienced a significant shift in the wake of the COVID-19 pandemic. While that has created new opportunities, it may also pose new risks for fraud. A shift in workplace arrangements, increased automation, and looming economic pressures have combined to create new threats that many organizations have not, or have not adequately, addressed.

March is Fraud Awareness Month — an opportunity to review potential new risks that could affect your business and steps you can take to lower those risks and reduce financial and reputational impacts to your organization.

How economic pressures are changing the risk landscape

The business environment is constantly evolving, and so are the risks of fraud. Stimulus programs, low interest rates, workflow automation, and other factors have made the past three years a breeding ground for fraud. With steady cash flow, many organizations may not have noticed financial shortfalls or inconsistencies. Moreover, a decrease in direct oversight may have afforded fraudsters more opportunities to cover their tracks.

It is only when financial pressures reveal discrepancies in the numbers, the fraudster has left the business, or when businesses attempt to tighten their belts, that some organizations discover the extent of fraud schemes in their business.

For leaders who suspect fraud within their organization, areas of increased economic pressure and those that allow for a lack of direct management oversight are a reliable place to look:

Increased economic pressure

Fraud most commonly occurs when three factors intersect: financial pressure, rationalization, and opportunity.

Many people are feeling the pinch of inflation and rising interest rates, along with fears of an economic downturn — for some fraudsters, these are perfect examples of financial pressure. The present economic uncertainty may motivate potential schemers to seize opportunities to defraud and justify their actions as a valid means of self-preservation.

Reliance on technology and unsupervised remote activities

The increased reliance on technology and unsupervised remote workplace arrangements during and after the COVID-19 pandemic has expanded a company’s susceptibilities to fraud — both due to the unique opportunities it’s presented to would-be fraudsters and vulnerabilities brought on through new processes and technologies.

The types of fraud that have increased in this environment include intellectual property fraud, payroll fraud, corruption, and vendor fraud, among others.

Additionally, many organizations now rely on operational software systems to automate workflow — the digitization of these systems can result in a lack of appropriate management oversight or replace critical thought, creating the opportunity for fraud to occur.

Encourage whistleblowers to come forward

Tips are by far the most common way that fraud is initially detected. According to the ACFE, 42 percent of frauds were detected by tips in 2021 — and more than half of those tips came internally from a company’s employees.

To detect fraud and minimize risks, it is very important to have a mechanism in place for whistleblowers to report their concerns in a manner that they are comfortable with. Consider providing an independent and secure whistleblowing service where employees can share their concerns anonymously.

Increase management oversight

Many organizations have increased their reliance on technology by using operational software systems to streamline workflow from different locations. This workflow automation and decrease in direct management oversight creates opportunities for fraud to occur.

Take steps to ensure your automated systems do not replace critical thinking and management scrutiny. Many frauds are accidentally uncovered by a bookkeeper, new manager, or auditor. Ultimately, people need to be managed as people perpetuate fraud — but increasing management oversight can help minimize the risks.

What is the impact of fraud?

According to the Association of Certified Fraud Examiners (ACFE)’s Occupational Fraud 2022: A Report to the Nations, the median loss from fraud in 2021 was more than $100,000. Beyond the financial impact, fraud can also have a negative impact on the reputation of your organization and cause strife with your funders, lenders, vendors, customers, and stakeholders.

Fraud can also have a devastating impact on the internal morale of an organization’s employees. When fraudsters are allowed to leave the organization without consequence to keep the fraud quiet and escape embarrassment, it may leave the remaining employees disenchanted with the lack of accountability in the organization — and questioning how far this lack of responsibility extends throughout management.

How to adopt a more intentional approach to fraud prevention and detection

No organization can ever fully protect itself from the risk of fraud. However, waiting to find frauds is costly — it is best to take proactive steps to protect your organization before the losses mount.

The following steps can help you address the rise in threats created by increasing economic pressures to discourage fraud in your business and increase the likelihood of uncovering fraud schemes:

Create an effective anti-fraud program

An anti-fraud program provides your business with the tools to manage risks in a way that is consistent with your business requirements and needs.

Effective anti-fraud controls are focused on:

  • Prevention — Controls designed to reduce the risks of fraud and misconduct occurring in the first place. Examples include a fraud and misconduct risk assessment, fraud awareness training, delegated authority limits, and more.
  • Detection — Controls designed to discover fraud and misconduct when it occurs. Examples include auditing and monitoring, ethics hotlines and reporting mechanisms, proactive forensic data analysis, and more.
  • Response — Controls designed to take corrective action and remedy the harm caused by fraud or misconduct. Examples include critical incident response protocols, governance reporting, disclosure protocols, and more.

If you don’t have an anti-fraud program in place, consider working with fraud experts who can advise on specific risks to your business and industry and recommend specific policies, practices, and controls to reduce your risk. Every organization is different, so it’s important to build a program tailored to your specific needs and risk exposures.

Fraud Risk Management

Think your business is immune to fraud? Learn more about Fraud Risk Management and download our fraud assessment checklist to find out.

Take the next steps to protect yourself

Fraud can happen to any business, and it is essential to remain aware of growing and emerging risks. As the business landscape continues to change and the prospect of an economic downturn creates additional financial pressure, the risk of fraud also continues to evolve.

Conduct a fraud risk assessment to identify and address the threats your organization may face, increase management oversight, and have a mechanism in place to encourage whistleblowers to come forward. While fraud risks will continue to grow and change, these measures can help protect your organization and employees from emerging threats.

Contact us

To learn more about Fraud Risk Management and how to protect your organization, contact Lisa Majeau Gordon, FCPA, FCA, CA•IFA, CFE, CFF, National Leader, Forensics and Litigation Support.

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