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Fraud in Recessionary Periods & Steps You Can Take to Prevent It

With the emergence of Sarbanes-Oxley and a greater emphasis on internal controls, many companies (large and small) convince themselves that the risk of fraud is not as great as it probably was in the past.  However, the exact opposite is true, especially during recessionary periods. 

During the two most recent recessionary periods, the savings and loan crisis in 1990 and the Internet bust in 2000, the arrests for white-collar fraud increased 52% and 25%, respectively.  If we fast-forward to 2009, as companies cut their workforces and reduce expenditures, there is also a corresponding reduction in internal controls and fewer proactive fraud prevention measures.  Decreased employee morale, coupled with added job responsibilities, fewer internal controls, and increased pressure to perform create an environment ripe for fraudulent activity. 

A survey performed by the Association of Certified Fraud Examiners, Occupational Fraud: A Study of the Impact of an Economic Recession, found:

1. The level of fraud and the dollar amount lost to fraud has increased since the beginning of the economic crises.
2. The current increase in fraud stems from the intense pressure faced by many individuals.
3. Employees pose the greatest threat to organizational resources in the current economy.
4. Fraud levels are expected to continue rising.
5. Organizations need to take seriously the threat posed by employees.
6. Fraud thrives in times of economic turmoil.
7. Even while facing budget reductions, companies have not cut spending on fraud-related internal controls.
8. Layoffs are pervasive and are leaving holes in organizations’ internal control systems.

The following are some simple steps that small companies can take to effectively manage fraud:

1. Create the expectation in your company that fraudulent activity will not be tolerated and that punishment will be swift and commensurate with the offense. 
2. Draft a Fraud Policy to address the risk of fraud and the actions that will be taken when fraud is suspected or reported.
3. Educate all employees on the importance of ethical conduct.
4. Conduct thorough background checks on all employees.
5. Establish and maintain an internal control structure specifically designed to prevent and detect fraud.

Would you like to discuss your internal control structure or any specific fraud risk controls, or do you need help drafting a fraud policy to improve your efforts to prevent, detect, and investigate fraud and misconduct?  Contact the fraud and forensic investigations experts in our Litigation Advisory Services Group at 440-449-6800. 

Topics: Litigation Advisory Services

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