Employee fraud in the pandemic: An employer’s response to the COVID-19 environment

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Employee fraud in the pandemic: An employer’s response to the COVID-19 environment

By: Dean Dorton | September 15, 2020

The COVID-19 pandemic has impacted employee fraud in the workplace. Learn how the pandemic has strengthened the three elements of the Fraud Triangle (pressure, opportunity, and rationalization) and how your organization can fight back.

2020 Fall Edition | COVID-19 Business | News & Views

By: Laban Miller | lmiller@deandorton.com

The average organization loses an estimated 5% of revenues each year to fraud, with a median loss per case of $125,000, according to the 2020 Report to the Nations on Occupational Fraud and Abuse.

While this is a current study, it does not quantify the additional impact that COVID-19 has had (and will continue to have for an indefinite time) on employee fraud in the workplace. Let’s take a look at how this pandemic has strengthened the three elements of the Fraud Triangle (pressure, opportunity, and rationalization) and how your organization can limit the damage.

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Financial Pressure

Financial pressure is a need or incentive to commit fraud. COVID-19 undoubtedly has created additional pressure on many workers’ lives as a result of lost jobs, reduced hours, health concerns, medical bills, future uncertainty—the list could go on. Are your employees experiencing an unusual amount of pressure?

How can organizations alleviate the pressure? Staying connected with employees builds trust and rapport. Monday morning video calls and Friday afternoon virtual happy hours are a couple of ways to stay connected. These small things can go a long way in boosting a team member’s morale. Also, counseling services can have a positive impact and could be a wise investment for an organization.

Opportunity

Opportunity is the means or access to commit fraud. The pandemic has shaken up our business processes. Corporate desks have shifted to dining room tables, and essential employees have found themselves in a ghost town of what formerly was the office. With these changes, opportunities for fraud have formed. In particular, a few opportunities stand out:

  • New vendors: With process changes and supply-chain issues due to shutdowns during the pandemic, companies are expediting the approval of new vendors and purchases to quickly obtain needed products and supplies. This is an opportunity for fake vendors to be added and fraudulent payments to be made without detection.
  • Digital approvals: With more employees working remotely, digital approvals are being relied upon more, which can make it easier to falsify signatures on documents such as expense reports, purchase orders, and vendor contracts.
  • Sensitive information: Company information such as IP, customer lists, payroll reports, and emails may be less secure in a remote work environment. Without proper IT controls over printing and distribution, sensitive information can be sold by employees or third-parties without detection.
  • Timekeeping: Reduced physical oversight in a remote work environment can provide employees with the opportunity to abuse time tracking controls.
  • Lack of communication: Being physically distanced from co-workers can make it less natural to ask questions when something doesn’t look right. For instance, a bookkeeper who sees a suspicious expense receipt may be less likely to inquire further about the legitimacy of the purchase when an email or phone call is required. Also, changed work hours of employees can be an obstacle to efficient communications.

How can you minimize fraud opportunities? You should reassess internal controls based on your modified financial and accounting processes during the pandemic. The interactive Fraud Risk Management Scorecard, produced by COSO and the ACFE, is a great starting point in assessing your organization’s fraud risk.

The ACFE’s 2020 Report found that 43% of fraud schemes were detected by a tip. Implementing an ethics hotline and raising organizational awareness about its use are great ways to combat fraud. If your organization needs an ethics hotline, reach out to the Dean Dorton team. We offer effective and affordable ethics hotline solutions to organizations of all sizes.

Rationalization

Rationalization is the ability of a fraudster to justify unethical actions. When the world feels like it’s been turned upside down, it can become easier to rationalize unethical behavior. While perpetrators of fraud have always found ways of rationalizing behavior, recent months have provided additional fuel for this kind of thinking:

  • “This is the only way I can provide for my family right now.”
  • “I’ve been loyal for 25 years, then they cut my hours. I have earned this.”
  • “My employer is doing fine; they just got free money from the government.”

Poor “Tone at the Top” was found to be the primary risk factor for financial statement fraud, according to the 2020 Report. “Tone at the Top” refers to the trickledown effect that an organization’s leadership has on the organization’s overall ethical culture. That tone is more important in times of crisis.

What steps can organizations take to maintain an ethical culture and “Tone at the Top?” Management’s words and, especially, its actions in setting that “Tone at the Top” are critical. Emphasize the team’s goals and the importance of each team member to the team. Truthful and empathetic communications are key.

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