When considering whether there is a direct link between a slowing economic environment and an increase of fraud, one must consider the underlying motivations of why people commit fraud.
As shown in the table below, two of the most common motivations of fraud are financial problems and/or pressure (representing 28% of reported cases), followed by the desire to maintain a lifestyle (representing 16% of reported cases).
| Comparative: Motivation behind fraud committed |
| Motivations |
%
|
| Financial problems / pressure |
28%
|
| To maintain a lifestyle |
16%
|
| Gambling problem |
11%
|
| Family pressure |
5%
|
| Revenge against the organisation |
3%
|
| Lack of appropriate compensation / rewards |
2%
|
| Drugs |
2%
|
| Other |
25%
|
| No response |
8%
|
BDO Not-For-Profit Fraud Survey 2008
As shown in the table below, the two major motivations and behavioural patterns underlying fraud, is individuals living beyond their means (representing 38.6% of reported cases), and individuals facing financial difficulties (representing 34.1% of reported cases).
| Behavioural red flags present during fraud scheme (sorted by frequency) |
|
Behavioural Red Flag
|
# of Cases
|
% of Cases
|
Median Loss
|
|
Living beyond means
|
370
|
38.6%
|
$250,000
|
|
Financial difficulties
|
327
|
34.1%
|
$111,000
|
|
Wheeler-dealer attitude
|
195
|
20.3%
|
$405,000
|
|
Control issues
|
179
|
18.7%
|
$250,000
|
|
Divorce / family problems
|
164
|
17.1%
|
$118,000
|
|
Unusually close association with vendor / customer
|
146
|
15.2%
|
$410,000
|
|
Irritability, suspiciousness or defensiveness
|
130
|
13.6%
|
$180,000
|
|
Addiction problems
|
128
|
13.3%
|
$225,000
|
|
Past legal problems
|
83
|
8.7%
|
$184,000
|
|
Past employment-related problems
|
76
|
7.9%
|
$163,000
|
|
Complaining about inadequate pay
|
70
|
7.3%
|
$132,000
|
|
Refusal to take vacations
|
65
|
6.8%
|
$250,000
|
|
Excessive pressure from within organisation
|
62
|
6.5%
|
$388,000
|
|
Instability in life circumstances
|
47
|
4.9%
|
$58,000
|
|
Excessive family pressure for success
|
40
|
4.2%
|
$90,000
|
|
Complaining about lack of authority
|
35
|
3.6%
|
$120,000
|
Association of Certified Fraud Examiners 2008 'Report to the Nation'
Do organisations need to be more vigilant against fraud in tough economic climates?
With the two major motivations for fraud being financial pressures and individuals living beyond their means, it is reasonable to suggest that organisations should be more vigilant in a slowing economy, particularly when individuals are experiencing increased financial pressure.
We would always recommend that organisations be aware of the potential for fraud and do everything in their control to implement both fraud detection and prevention measures.
Detection controls will help detect a fraud after it has occurred, while prevention controls will help prevent fraud from occurring. Regardless of the size of an organisation, being proactive against fraud is imperative.
Further tips to enable an organisation to develop a proactive approach against fraud are as follows:
- The development of a Fraud Control Policy and Whistleblower Policy
- Undertaking a Fraud Risk Assessment at least every two years
- Review controls regularly
In particular, the review of controls (and the processes surrounding them) is important for any organisation.
During an economic downturn, it is not uncommon for organisations both large and small to consolidate job positions and/or not replace staff that may have ceased employment or moved to other areas of the organisation.
Furthermore, organisations may be forced to decrease the number of staff employed, and therefore should be aware that there will potentially be a decrease in the segregation of duties, especially in key areas, such as financial operations.
As segregation of duties diminishes - especially when responsible for financial operations - there is an increased risk of fraud occurring. Segregation of financial duties will prevent an individual having complete control and therefore the potential for fraud diminishes.
Take for example an organisation that has one employee, who authorises all expenditure, prepares and makes all payments and completes the bank reconciliations. This organisation is susceptible to an increased risk of fraud occurring (due to a lack of segregated duties), as opposed to an organisation that segregates these duties between a mix of employees.
The effect of fraud on an organisation can be devastating. When considering the cost of fraud on an organisation, most of us would generally only consider the initial cash that has been stolen.
However, organisations should also be aware of the additional costs of fraud - including the often overlooked constraints fraud can have on debt covenants.
At present, many organisations are faced with increased pressure to meet their debt covenants. Potentially, as a result of a fraud, an organisation may be faced with the situation that they are no longer able to meet their required debt covenants.
Moving forward
With the two major motivations for fraud being financial pressures and individuals living beyond their means, and businesses tightening their belts through consolidating employee roles, organisations need to be vigilant during the current economic climate.
However, we suggest, regardless of the economic environment, organisations should be aware of the potential for fraud and do everything in their control to implement both fraud detection and prevention measures.