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Fraud Risk in a Crisis

By Daniel Butcher
November 1, 2020
1 comments

Many executives are concerned about a surge of fraud, highlighting the importance of an ethical culture.

 

Crises can create conditions for fraud and unethical conduct to run rampant. For example, business loans handed out as part of the 2020 U.S. Coronavirus Aid, Relief, and Economic Security Act’s $659 billion Paycheck Protection Program have attracted scrutiny and led to accusations of fraud. Despite the heightened awareness of fraud since the start of the COVID-19 pandemic, some executives may be overly confident in their ability to eliminate it. In the current environment, bad actors have tried to take advantage of business aid packages and vulnerabilities in organizations’ systems. It’s an important reminder that, despite competing priorities, remote-work challenges, and thinly stretched bandwidth, fraud is a risk that finance leaders need to manage actively.

 

In June 2020, Deloitte polled more than 1,200 senior executives, including CFOs, about the fraud, waste, and abuse that they expected their organizations would have to contend with, both broadly and specifically pertaining to stimulus-funding awards. More than half of respondents expected fraud, waste, and abuse schemes to increase in the ensuing 12 months. Executives expected fraud cases to originate from both known and unknown parties: 28.1% expected fraud to stem from current employees, while 24.4% expected individuals with no ties to an employee or vendor to commit a breach of ethics. In addition, 39.5% of respondents predicted that, related to stimulus funding, the top scheme to increase would be improper payments.

 

“During times of economic volatility and major disruption—especially when there’s money being pumped into the system, like with U.S. stimulus-funding awards—the stage is set for bad actors,” said Don Fancher, principal and global forensic leader at Deloitte Risk & Financial Advisory. “An influx of money globally can present fraudsters with the potential to manipulate the system and take advantage of opportunities. Existing fraud is often exposed during a time of economic downturn, as heightened attention may be placed on how money is flowing in and out of an organization.”

 

Common pitfalls that enable fraud or prevent detection include vulnerabilities in information technology or systems, human error, and failure to heed warning signs.

 

“Make sure your organization has reviewed and updated all programs and controls in place to actively monitor for fraud, waste, and abuse risks,” Fancher said. “This is important given the COVID-19 environment and the fact that our workforces and supply chains are remote and distributed.”

 

Even though many professionals are working remotely, it’s still important to keep training your company’s personnel and to ensure that these issues remain top of mind. Taking a reactive vs. proactive approach could result in major challenges with fraud management.

 

Oversight of vendors, i.e., suppliers and third-party service providers, should play a key role in every company’s anti-fraud initiatives. Conduct background checks, due diligence, and risk sensing of vendors, and use social media analytics to assess people with whom you’re doing business on a regular basis. “Organizations should also continue to monitor financial activity post-crises and compare that with what was happening pre-crises to discern if there were improper pricing techniques, invoicing, or inventory controls that may be at higher risk of fraud schemes,” Fancher said.

 

ENCOURAGE ETHICS

 

No organization is immune to unethical behavior, but CFOs and other management accountants who follow best practices can encourage ethical conduct among employees generally and finance team members in particular.

 

“In our poll, C-suite and other execs said they expect that current employees are high on the list of those committing fraud, waste, or abuse within their organizations, so this concern is there,” Fancher said. “It’s important for CFOs and other leaders to continue to train their employees on these risks. Leadership must voice the importance of these issues to help to keep them top of mind for employees.”

 

While it’s more difficult to influence nonemployees, finance executives are responsible for vetting vendors, contractors, and suppliers. Software can help detect risky partners.

 

“Our poll also found that a quarter of individuals with no ties to organizations are expected to perpetrate stimulus funding fraud, waste, and abuse schemes,” Fancher said. “Those unknown third parties can be detected and sometimes halted when strong fraud risk monitoring and targeted analytics are used to help identify specific actors and outline those risks to be mindful of.”

 

BENEFITS OF OVERSIGHT

 

CFOs weigh the cost of implementing advanced technologies to monitor and manage fraud schemes vs. the benefit of making it easier to quickly identify and remediate fraud, waste, and abuse, as well as other ethical lapses.

 

“While there will clearly be up-front costs in implementing the right programs and technologies to monitor and manage fraud risks, the long-term benefits are huge,” Fancher said. “When organizations can actively implement program solutions to mitigate the risks from fraud, waste, abuse schemes, and other ethical issues, they ultimately impact their ROI [return on investment] quite significantly. This is achieved by reducing inappropriate spending, reducing risks of corruption and potential regulatory activity, and positively impacting brand reputation to enhance trust.”

 

Myriad cautionary tales of fraud and unethical conduct are particular to accounting teams and the finance function.

 

Fancher said, “The executives we polled felt improper payments would be the most likely scheme their organizations face around stimulus funding. Respondents were also concerned about financial disclosure, reporting fraud, embezzlement, and corruption or kickbacks.”

 

There’s a logical connection between anti-fraud initiatives and professional ethics. Fancher said, “Both anti-fraud initiatives and corporate ethics program tenets need to be communicated regularly by leadership.”

 

Ongoing monitoring can help management to discern if the company’s training and communication initiatives are making an impact on fraud schemes, and improve them over time. That will reinforce the organization’s ethical culture.

 

IMA ETHICS HELPLINE

 

For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.

 

In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.

 

The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.

 

Daniel Butcher is the finance editor at IMA. You can reach him at daniel.butcher@imanet.org.
1 + Show Comments

1 comment.
    BABU RAZACK CMA, ACMA November 7, 2020 AT 10:20 am

    Nice article ; very valuable words are “While there will clearly be up-front costs in implementing the right programs and technologies to monitor and manage fraud risks, the long-term benefits are huge,” Fancher said. “When organizations can actively implement program solutions to mitigate the risks from fraud, waste, abuse schemes, and other ethical issues, they ultimately impact their ROI [return on investment] quite significantly. This is achieved by reducing inappropriate spending, reducing risks of corruption and potential regulatory activity, and positively impacting brand reputation to enhance trust.”

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