Due to the COVID-19 crisis and the measures that governments and companies have taken, a significant increase in fraud risks becomes apparent. The main reason being an extremely vulnerable control environment.
In this article we look into the different risks based on three components of fraud: Pressure, Opportunity and Rationalization.
Everybody is looking to the right, where Corona is, while fraud is happening on the left. Management is focusing on limiting the impact of Corona on the daily business routines. As a result, little to no time is allocated to monitor relevant key risks. This leads to blindness for weak spots in the business' processes. Over the last couple of days large and smaller companies have instructed their employees to work from home. This creates a number of opportunities for increased fraud risks, such as:
Over the last few days stock markets and companies have taken a hit based on the uncertainty of the impact of the COVID-2019 virus. A decrease in demand due to companies delaying orders, reduction of the production in factories and postponing investment decisions, have a direct impact on the local and international economies. As a result, for companies that fear difficult financial times contain a higher risk of management override of controls. Pressure can lead to manipulation of the financial results. For instance either to comply with bank covenants (1) or to be eligible for governmental fund regulations (2):
When the tension is high and much is uncertain, deviant behavior is easily justified. One example is the extreme hoarding of mouthpieces and medicines. Hospitals in multiple parts of the Netherlands have recently centralized their supply of medical resources in an attempt to stop the 'disappearance' of these items. Another example is the large purchase of toilet paper, medicines and hand sanitizer by consumers who fear an overall shortage. Even when governments specifically request citizens not to stock up on products.
Examples of companies taking advantage of the situation popped up quite quickly too. The FDA and the FTC last week identified seven companies that were marketing illegal, unapproved drugs and making deceptive or scientifically unsupported claims. In the first days of the outbreak, many small companies popped up offering mouth masks for extreme prices.
The rationalization effect on management level is often a result of trying to keep the company afloat. Management rationalizes: "in this difficult times I have many employees and their families to protect therefore unprecedented measures are for once allowed" or "if we shift some result between periods we will not breach our covenants, we will resolve this on a later moment when the crisis is averted".
A reversed effect is also often shown in crisis situations. Because everyone is focusing on the crisis, this is used as an excuse to make unfavorable decisions (restructuring, discontinuing the production of certain products). Employees or staff are paying less attention. Or the measures are labeled as unforeseen necessity: we have to act to save the company.
An important measure not to be underestimated, is to follow-up on suspicions of fraud and investigate. The tendency of companies in crisis situations is to keep looking at the right when a quick and thorough investigation can help reduce the (financial) losses. As a valuable by-effect, investigating results in lessons learned on how to improve the robustness of your procedures.
Following our experience, we know the next elements can help you protect your business from fraud risks:
Changes in capacity
In- & Outside risks
In short, this is the moment to reflect on your fraud risk management system and review its robustness in the current situation. For a quick overview of the weaknesses and possible blind spots in your current (crisis) processes and procedures, including recommendations on how to mitigate these risks, please feel free to reach out. We perform a thorough and in-depth review, working remotely.
Do not hesitate to contact Heleen Hoynck Van Papendrecht.
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