When the economy takes a downturn, fraud increases, according to an online poll conducted by Deloitte Financial Advisory Services (FAS).
Nearly two-thirds (63.3 percent) of executives polled during a recent webcast expect accounting fraud to increase during the next two years.
“While fraud is committed during strong economic conditions, it is clearly exacerbated in declining markets,” said Kerry L. Francis, U.S. chairman of the board for Deloitte FAS. “Smaller paychecks, reductions in employee headcount and internal controls, as well as diminished morale, are just a few factors that can open the door to fraud in a down market.”
Industries experiencing the greatest risks for potential accounting fraud during downturns include: computer, retail and other service industries such as telecom and healthcare.
Historic fraud schemes during a downturn include manipulation of revenue recognition, reserves and inventory or cost of goods sold. Additional potential fraud schemes in this economic downturn may include improper or omitted disclosures in financial statements and Foreign Corrupt Practices Act (FCPA) violations.
To prepare for the risks that a downward economy poses, 45.7 percent of respondents indicated their organizations have established protocols for conducting investigations.
Executives also report that fraud awareness training throughout organizations (38.7 percent), more robust fraud risk assessments (21.5 percent), and expansion of internal audit monitoring efforts (20.3 percent) would most assist their organizations’ fraud prevention efforts in the face of the current economic environment.
“Strong anti-fraud programs and controls can reduce fiscal, investigative and reputational costs,” said Donna Epps, partner and national leader of Deloitte Financial Advisory Services’ Anti-fraud Consulting practice. “It is important that controls are created, implemented and monitored to mitigate fraud. Clearly communicated, written guidance helps promote an integrated fraud prevention program across all levels of an organization.”
Some leading practices Deloitte recommends to help companies mitigate fraud risk include:
- Update fraud risk assessments regularly to reflect current conditions
- Clearly define anti-fraud program roles and responsibilities of the board, the audit committee, company management, and line employees.
- Set a positive, anti-fraud tone at the top by communicating consistent expectations for all employee.
- Establish and maintain an effective whistle-blower hotline that is both accessible and confidential.
- Continue fraud awareness through regular training.
More than 1,280 executives from the banking and securities, financial services, and technology industries responded to the poll during the webcast titled “Financial Fraud: Does an Economic Downturn Mean an Uptick?”