The fraud triangle is a well-known tool in understanding fraud. The three sides – opportunity, incentive, and rationalization – offer an explanation to a person's decision to commit fraud. Similarly, they offer guides to preventing fraud: by addressing the three sides of the triangle, an organization can reduce its risk of fraud.
In a financial crisis, such as we are seeing during the COVID-19 pandemic, all three sides of the fraud triangle indicate an organization is at heightened risk of fraud. Individuals and companies facing serious financial pressure have incentive to commit fraud. Where there are staff reductions, employees working from home, or management focused on critical functions only, unique opportunities arise for committing fraud. Finally, the extreme stress of the pandemic offers ample rationalizations. It is the perfect storm for fraud. As such, companies need to pay more attention than ever to appropriate controls and procedures to prevent and detect instances of fraud.
An organization should consider the following as part of its fraud prevention controls:
- Assess your internal control environment: have recent personnel changes compromised your control functions, such as segregation of duties or dual authorization? Take steps to ensure the control environment has not been inadvertently damaged by recent changes.
- Take care with contractors and third parties. Ensure proper controls are in place to verify invoices and obtain the proper back-up documentation.
- Work with your IT team to be on high alert for cyber-attacks, such as phishing schemes.
- Establish a strong tone from management that fraud prevention is key area of concern. Reinforce to all employees, particularly those in positions sensitive to fraud, that all prior policies and procedures still apply. The unique circumstances do not justify cutting corners or skipping important steps. To the contrary, these challenging times require your employees to be alert to fraud.
- Ensure your human resources team is checking in on team members. Your HR team should be well informed of the "red flags" of fraud in employees, and should immediately report any suspicions. Those suspicions should be promptly reviewed and investigated.
- Ensure your employees, contractors, and third parties are aware of your whistleblower line and that this line stays fully operational throughout this crisis. Whistleblowers are the main source of detection of fraud.
Fraud risk management is an important business function in these uncertain times. Companies that fail to enforce strong controls will face the consequences in the months and years to come.
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