The Perfect Storm: Fraud in an Economic Downturn

By By Joseph T. Wells, CFE, CPA


joseph-wells-50x50.jpg   My Take 

If you didn’t have enough money to feed your family or pay your bills, would you turn to fraud? Or if you were running a multibillion-dollar corporation and thousands of families depended on your company’s stock price, would you turn to fraud?

The answer, of course, is that it depends. And much of it depends on personal integrity, which isn’t usually measured in audits. Although internal controls are supposed to mitigate opportunities to commit occupational fraud, there are several flies in the internal control ointment. First, controls have a bigger role than just to prevent financial malfeasance. Second, there are few internal controls that can’t be negated or circumvented by those with a strong enough motivation. Third, if you’re high enough up the ladder, you can simply override them. As I’ve written previously, good internal controls are a vital element in fraud deterrence. But they aren’t a panacea. It’s necessary for us to take a broader view of fraud to recognize it as the social phenomenon it is.

Here are three factors that make occupational fraud in an economic downturn the perfect storm:
• Increased (and often severe) financial needs
• Decreased loyalty to the company because of real or potential layoffs
• Increased opportunity due to the elimination of “nonessential” positions such as auditors and fraud examiners

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