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Businesses across all sectors are dealing with disruption as a result of COVID-19 and in many cases are experiencing a challenging period while they try to ensure their business continues to be viable. Such circumstances have unfortunately created a fertile ground for fraud and misconduct risk, including the potential for exaggeration of financial performance and balance sheet strength.
What does this mean for your business?
The primary responsibility for the prevention and detection of fraud, which extends to financial misreporting, rests with the board and senior management as set out in the International Standards on Auditing and the UK Corporate Governance code.
Management and directors should be assessing the heightened risk of fraud presented by the pressures and new working arrangements of COVID-19 and ensure their control environment is able to mitigate such risks.
It is important management include not only their response to the current situation, but continue their assessment through the recovery process as different risks and motivations will arise.
In December of last year, Sir Donald Brydon also completed a review into audit quality and effectiveness in the UK. Amongst the recommendations from his review is a new reporting duty on directors to set out the actions they have taken each year to fulfil their obligations to prevent and detect material fraud against the background of their fraud risk assessment.
COVID-19 has amplified the drivers for financial statement fraud as a result of:
Examples of financial statement fraud in the current environment:
How can you mitigate these risks?
Clear communication and tone from the top
Judgement areas in accounting policies have the potential to be significant in the context of market updates and financial reporting. There should be frequent communications between senior management and the board to ensure that any key issues are addressed, decisions are fully documented and outcomes monitored. In addition, management should clearly communicate to all employees that the code of conduct remains in place.
Update your fraud risk assessments
Produce clear documentation that sets out the impact of COVID-19 on your operations, the risk mitigation processes and the implications for financial reporting. You should specifically consider which areas of your financial reporting are subject to a greater degree of judgement and therefore may be at risk of manipulation. Agree and document any modifications that are made to the internal control environment to mitigate this risk. This should be continually reassessed as the situation evolves.
Review internal controls
Segregation of duties should be maintained, with modifications required for any new working arrangements applied consistently and documented. Remote access to company systems should be reviewed so access is limited to the correct individuals. Businesses should seek to maintain normal supporting documentation standards and move to agreed digital alternatives where applicable.
Review monitoring processes
This should include a consideration of new activities, as well as being alert to any unusual transactions which could relate to pre-existing frauds emerging as a result of new working arrangements.
Maintain appropriate records
This should include the documentation of any decisions and the associated approvals process in areas such as journals, accounting estimates, valuations and forecasting.
Amber Andrade is a Director in Deloitte’s Forensic team. Her practice spans investigations into accounting misstatements, whistle blower allegations, regulatory reviews and skilled person reports, as well as large, complex expert witness and advisory engagements. She works with clients across a variety of industries and as part of the Deloitte Financial Services Disputes leadership team. Amber has significant experience in contentious matters in the financial services sector, where she has prepared many expert accountant reports, requiring her to work closely with clients and their legal teams in a wide variety of high-value, global, disputes and investigations.
A qualified Chartered accountant, Rob is a Director in the Firm’s Forensic practice. He has over 10 years’ forensic experience working predominantly on investigations into issues such as accounting misstatements, fraud, bribery and corruption, tax evasion and sanctions breaches. He also provides advice on all aspects of the economic crime compliance lifecycle and has assisted clients on complex financial disputes. He has significant experience in working alongside legal teams and responding to regulators’ requests and he provides his services across a wide range of industries.