Surviving Risk and Fraud in a Tough Economy

Staying in business and maintaining reasonable success is no easy matter in today’s world. In the past, a business’s primary focus was on increasing profits, doubling growth, and controlling expenses. Not so, in this tough economic climate – survival is the name of the game.

What impact, if any, could the troubled economy have on the magnitude and severity of business fraud? In order to help answer this question, consider the following:

  • Creditable fraud surveys report that these thefts have reached near-epidemic proportions with loss estimates ranging upwards to nearly one trillion dollars.
  • Next, let us look at the dramatic shift in the ways that organizations are trying to survive: 1) Companies are eliminating jobs in order to stay in business. Forecasters and experts such as Alan Greenspan are now predicting that the 2010 unemployment rate will remain at 10 percent before we start to see any downward trend over the next few years. 2) Scarred by the worst financial crisis since the 1930s, companies are squeezing more work out of fewer employees by increasing workloads and consolidating jobs.

Good Choices – Bad Choices
Both the unemployed and employed are suffering deep losses in their home equity and stock portfolios, and facing heavy debt. Gone are the days of easy credit and instant loans. For those able to qualify, borrowed monies are not only harder to get – they also come with higher interest payments.

As economic pressures build, climbing household and personal debt combined with an inability to pay will force a huge number of employees into situations where they will encounter intense work-related and personal pressures.

In some situations, those uncontrollable pressures driven by such things as large credit card balances, overdue home loans, household expenses, car payments, medical bills, gambling, drug or alcohol addiction, will become so insurmountable and theft opportunities so convenient that a number of the previously highly trusted and honest employees will succumb to internal fraud.

Risk Levels
Yet, under such pressure building circumstances many managers will continue to entrust their operation’s poorly supervised and highest risk tasks to those employees they perceive to be loyal and trustworthy.

As part of this multiple tasking process, a number of managers are either setting aside or refraining from implementing a few critical internal controls that are known to effectively prevent internal crimes from taking place. In fact, a 2009 fraud survey reported that inadequate controls (66 percent) and management override of controls (47 percent) were viewed by business executives as the top enablers of internal fraud and dishonesty.

Blame Game
Generally, when an act of internal fraud is discovered, management quickly begins to question how such a costly crime could have gone on for so long without the auditors or someone catching onto it. Next is the blame game; as some top executives look to finding fault with the manager and supervisor for not doing their job.

The Fleet Manager

I remember an interesting example of the “blame game” that took place within a middle-size operation in the Southwest. An internal fraud that had been taking place over a five-year period was accidentally uncovered. Upon our arrival to investigate this matter, we found the CEO and Executive Vice President ready to fire the Finance Division’s top executive for not staying on top of things and allowing such a crime to take place. After a discussion, the two executives agreed to hold off on this firing and not take any action until our investigation was completed.

Our findings revealed that a few months prior to the initial fraud act taking place, top management in a cost-cutting move, eliminated an important financial control position. At that time, this company’s highly trusted Fleet Manager who was already responsible for ordering and receiving truck parts was also given the authority to approve invoices for all truck parts ordered by his department. 

You get the picture! This “trusted” executive was now ordering, acknowledging receipt of, and approving all truck parts-related invoices. The only role that finance personnel played in this matter was to routinely process and pay all of those previously approved invoices.

In conclusion, the Fleet Manager and one of his principal vendors were convicted in this half-million dollar fraud scheme. The Finance Division’s executive who had voiced concern about the decision to eliminate this critical control position was able to keep his job and that critical internal control position was promptly reinstated. 

As the above example illustrates, not only can management’s erroneous rush to judgment regarding whom to blame when an internal crime occurs end up seriously penalizing an innocent employee, but such swift action – without proper analysis of the situation – the actual condition that allowed the crime to take root may not be identified.

In the eyes of many, if ever there was a “right time” for an internal thief to strike, that time is now.

The message should be very clear. No organization or industry is immune to this growing problem and the opportunity for a “trusted” co-worker to commit internal fraud is rampant in those operations where management is lax and critical internal controls are weak or ignored.  $

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