COVID-19 is inducing a lot of stress for business owners. Economic hardships often pose a vast array of challenges; one of the key issues is heightened vulnerability. In fact, the Federal Trade Commission has issued warnings to businesses regarding fraud schemes related to COVID-19. However, many business owners don’t take into account the risk of internal fraud.
How does COVID-19 put businesses at risk for fraud?
There are three key reasons COVID-19 might put your business at increased risk for fraud.
- If your organization has suddenly transitioned into a work-from-home environment, there probably isn’t sufficient protocol in place for proper checks and balances. Monitoring fraud becomes tricky when your entire team is operating remotely.
- If you have downsized your organization – i.e., you had to let go of upper-level staff to curtail high salary expenditure – you are now engaging someone who is not as qualified for the job to fill this unforeseen gap. They may unintentionally or intentionally succumb to fraud.
- Businesses who are desperately trying to cut costs right now often roll back on departments that aren’t revenue-generating, such as internal audits and compliance. This does away with anti-fraud defense programs at a time when pressures driving employee fraud are at an all-time high.
What sort of fraud might take place during COVID-19?
According to the Association of Certified Fraud Examiners (ACFE), the average organization loses 5% of its annual revenue due to fraud even during a “normal” year. Right now, the situation is even more severe; business owners are facing fear and confusion – as a result, they are lowering their guard. This is the perfect recipe for fraudulent activity! Right now, fraud may manifest in the following manner –
- Illegal, predatory pricing that has nothing to do with supply-and-demand. Amazon has been in the news quite a bit regarding cracking down on such sellers. Your business might be getting ripped off by vendors.
- Many businesses are receiving fake inquiries and solicitations for crisis prevention scams. Your philanthropic efforts might be in vain.
- Employees who lack integrity and who are feeling stretched might rationalize fraudulent activity while under unprecedented pressure.
What is a forensic audit and how can it help businesses during COVID-19?
The Association of Certified Fraud Examiners (ACFE)’s Report to the Nations Global Fraud Survey clearly emphasizes the value of an internal audit this year. We recommend taking it to the next level, with a comprehensive forensic audit, which is designed to detect and deter fraud. In a nutshell, a fraud audit consists of the following:
- an accounts payable audit –
– Review of accounts payable processes, policies, and procedures
– Fixing of the gaps in the processes
– Uncovering of duplicate payments, fictitious vendors, calculation errors and frauds
– Assessment of where and why revenues are being lost
- a time and expense (T&E) audit –
– Finding duplicate receipts
– Detecting suspicious merchants or attendees
– Revealing unapproved or excessive spending prior to reimbursement
– Certification of each expense against your policies
– Uncovering of fraud / waste that is detrimental to your bottom line
– Development of protocol to ensure the accuracy of expense reports and time tracking
- analysis of common methods of past frauds
- analysis of breakdowns in fraud detection methods
- analysis of demographic of fraudsters
- identification of the most common red flags
- setting of clearer business prophecies and policies
- implementation of robust documentation protocol to mitigate future fraud risks
Is there any data to back the value of audits in deterring fraud?
The ACFE’s report examined over 2,500 fraud cases in 125 countries from 2019. It indicates that internal audits –
- uncovered fraud in 15% of the cases
- reduced median losses to occupational fraud by half ($100,000 instead of $200,000)
- reduced the duration of fraud by half (1 year instead of 24 months)
Furthermore, several other reports indicate that because T&E expenses are the second largest operational cost for most businesses, it poses a high risk for abuse, whether it be duplicate, fraudulent or avoidable entries.
“Merging both audits into one comprehensive fraud audit safeguards your brand from any unwanted attack or loss.”
What else can businesses do to reduce the risk of fraud?
In addition to conducting an urgent fraud risk assessment, businesses can also –
- Revamp policies and procedures – communicate these changes to the entire team to reinforces fraud prevention tactics
- Segregate duties – this reduces gaps so employees do not misuse assets
- Promote employee integrity through accountability – redirect attention to long-term professional relationships / gains versus short-term, “short-cut” gains
It’s natural to feel overwhelmed as a business owner right now. But, you don’t have to be a victim of fraudulent activity in the business you’ve built with so much hard work and passion. If you would like to sign-up for a consultation to determine if your organization would benefit from a fraud audit, Contact Us.