Posted: 09 Nov. 2020 5 min. read

Fraud protection

The new economic imperative

Why the new normal could enable an abnormal level of fraud – and how to prevent it

Disruption. If there’s one word that best describes the effect of COVID-19, then that must be the winner. In a matter of weeks, everything about our lives – both personal and business – was disrupted.  Now we face new challenges, with many fighting for economic survival in the wake of the global downturn caused by COVID-19.

This is good news for fraud, because disruption, recession, and the uncertainty they cause, deliver the three key elements that together make fraud possible: pressure, opportunity and rationalisation

The ‘Cressey Fraud Triangle’ shows three elements often present when fraud occurs in any organisation: Pressure, Opportunity and Rationalisation

It’s a universal challenge too. Rooted in human nature, and often stemming from a misguided desire to preserve and protect, fraud is industry-agnostic. No organisation can afford to ignore it. Companies need to understand that when the rules of the business game unexpectedly change, it’s easier for the players to cheat and be cheated. To offset that threat, their fraud protection tactics need to adapt accordingly and quickly. 

Indeed, if committing fraud requires a certain state of mind, then preventing it also demands a particular corporate attitude. One that is open to both the current problems and the latest solutions.

Recognising the problems and finding the solutions

Fraud comes in various shapes and sizes. For business leaders, understanding and proactively protecting their organisation against the risk of fraud or misconduct is vital to preserving value and integrity.  

The board and management don’t need to be technical experts, but they should know enough about fraud, and how and where it might manifest, to have an informed opinion and understand the right questions to ask. 

Questions like…

  • Do we have an up-to-date understanding of the potential fraud and misconduct threats we face?
  • Are we managing and mitigating fraud and misconduct risk appropriately? If so, is our fraud risk management approach  well-embedded within our organisation and culture?
  • Have we assessed our current fraud prevention controls to ensure they operate effectively in an almost completely virtual environment?
  • Do we manage third party risk and if so, are we taking appropriate precautions?
  • If fraud or misconduct emerges, do we have adequate response measures to handle it?

…If your organisation cannot answer those in the affirmative, then it is time to readdress its approach to fraud.  

But where do you start? 

That’s where we come in. To help you ask the right questions, then recognise and proactively address the risks, we have invested considerable lockdown time putting together a range of online content. 

The impact of COVID19 – a changing landscape for fraud and conduct risks explains how fraud has altered across all industry sectors, increasing the risks of financial misreporting, the misappropriation of funds and valuable data, as well as misconduct by agents, employees, management and directors.  

For example, faced with challenges in the supply chain and fluctuations in customer demand - in some sub sectors, unprecedented demand - businesses are engaging with new third parties to source products or new trading opportunities.  However, doing this hastily brings the risk that policies and procedures are sidestepped, which, coupled with mass remote working and disrupted controls processes, can expose corporates to heightened external fraud risks.

The risk of Financial statement fraud has also increased significantly as a result of recent challenging trading periods and the pressure on companies from stakeholders to ensure businesses remain viable – potentially triggering the exaggeration of performance and balance sheet strength. 

What’s more, companies are having to cope with a spike in the fraud threat from within. Employees’ personal financial pressures caused by the threat of redundancy or salary and bonus reductions, can lead to misconduct and misappropriation, especially if they have become disengaged or their actions are now subject to less scrutiny and oversight. There are also many cases where misguided staff justify their improper actions as necessary for the efficient running and survival of the business.

And did you know how easy it is to become an unwitting participant in VAT fraud? A particular risk for those in the telecoms industry, all that is needed is a traded commodity, physical or virtual, and you can fall into The VAT Fraud Trap where you can be held responsible by relevant tax authorities, even if you didn’t know there was a fraudulent actor in the supply chain. 

Food fraud can also be incredibly damaging to unsuspecting companies. The article Food fraud and supply chain integrity explains how they not only face the cost of regulatory action and fines, but also reputational damage and the loss of consumer confidence.  

Looking forward to effective fraud protection measures 

Prevention is always preferable to cure. It’s cheaper too. Which is why in the forthcoming unpredictable months you can, at least, be certain of one thing: our team at Deloitte will be promoting ways to protect your organisation from fraud. 

This will include building on our current online content with more insights, blogs, case studies, articles and interactive tools. 

The aim is simple: to persuade management and boards of the wisdom of revisiting their existing fraud risk assessments, adapting control processes and deploying effective monitoring to ensure they remain fit for purpose. 

Taking preventative action is common sense and should be front-of-mind for all businesses, particularly given the enhanced scrutiny outlined in the Brydon Report (December 2019) that proposes a duty on directors to report how they have mitigated material fraud risk.

It is also integral to future-proofing business against uncertain times. For business leaders, understanding and actively protecting their organisation against the risk of fraud or misconduct at a time of recession is not only vital to preserving its value and integrity, but also to re-establishing profitable future trade.

What next?

We’ve done our best to give you a clear snapshot of a complex and increasingly pressing issue, but you will, no doubt, have questions that pertain to your particular business sector or situation as you ask yourself: how do I ensure enough is being done to protect the  business against fraud and what are my responsibilities with respect to preventing it?  

When it comes to fraud protection solutions, one size does not fit all. As every business is different, the answer lies in a conversation with an expert.

And if you would like to be kept up to date with the latest content, activities and events relevant to this topic, just click here.

For further information on how we help clients Protect, Monitor and Respond against the threats of economic crime click here

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Key contacts

Simon Cuerden

Simon Cuerden

Crisis and Resilience Lead Partner: Forensic

Simon leads the UK Crisis and Resilience practice. Simon is an experienced forensic practitioner, with over 16 years’ experience as a partner. He has extensive experience of working with special committees drawn from the boards of organisations to oversee forensic reviews and investigations into sensitive incidents and circumstances which have led to public, regulatory and government scrutiny. Simon has interacted with, and overseen the preparation of reports and material that have been provided to, various regulatory bodies. Simon is also an experienced disputes practitioner, acting in court, arbitration and determination processes. He has been named by Who’s Who Legal as one of the leading experts in quantum of damages and investigations.

Julian Colborne-Baber

Julian Colborne-Baber

Partner

Julian specialises in forensic advisory and conducting financial crime investigations. He has led and advised on a number of cases involving AML, corruption, sanctions, fraud and accounting irregularities. He is experienced in dealing with retained counsel, client management, other third parties and prosecutors and regulators. His particular focus and expertise is in the financial services sector. He has also led corruption and fraud work in the oil and gas, automotive and technology sectors.