The occurrence of fraud dramatically increases when companies find themselves in situations where it is not “business as usual”. Geopolitical changes, such as Brexit is an example of such a situation and if proper controls are not in place, a company can very quickly be vulnerable to a multitude of possible fraud risks.
The perfect storm is a set of circumstances that when found occurring together, will increase exponentially the likelihood of fraud occurring. Brexit for example, has caused much discussion, angst, and uncertainty – and thus creating the perfect storm for fraud. Rain, thunder and lightning are not needed but the impeding clouds over the horizon is already enough to entice otherwise good employees to commit fraud.
The uncertainty around Brexit can be compared to the same environment that business faced 10 years ago during the 2008/2009 economic downturn. If you fear that you will be laid off and won’t have enough money to pay your bills, would you commit fraud? If you are running a company and hundreds of families depend on you for their pay checks and your company’s stock price, would you engage in unethical business activities?
The consequences of Brexit for business have been the talked about, debated about and hypothesized about – but very little was mentioned with regards to how this disruption to “business as usual” and how the feared outcomes that Brexit may bring, can lead to the opportunity for fraud and corruption – if adequate controls are not in place to ensure good governance.
Why does fraud and corruption happen? Fraud happens when Opportunity, Pressure and Rationalization collide. With increased pressure and decreased internal controls due to the elimination of “nonessential” positions such as auditors and compliance staff, people justify inappropriate behavior when in (perceived or actual) dire straits. Companies are restructuring which has an immediate effect on internal controls – this offers opportunity. Declining stock prices or possible impending layoffs will create pressure and the rationalization will come in the form of “doing it for the good of the company” or loyalty to one’s superior by following inappropriate instructions. Brexit offers a convergent of these three elements, similar to the barometer dropping, the wind increasing and the clouds covering the sky – all signs of impending trouble.
Risk areas to focus on in current situation of uncertainty
- Contractors, consultants, advisors
- Tax Fraud: filing wrong tax statements to protect margin and profitability
- Customs Fraud: falsifying transport documentation to “smooth” customs process
- Licence Fraud: giving wrong information to obtain licences required or to sped up licence process
- Bribing government officials to obtain licences
- Paying bribes to win contracts, flagrant theft, …
- Local Project Partners:
- Asset misappropriation: duplication of payments, alterations of and tampering with invoices and other supporting documents, alteration / duplication of accounting records (“creative bookkeeping”), misuse of funds, unreported discounts, unauthorized use of project / company property, excessively high operational expenditures
- Expenses Fraud: unnecessary foreign travel to meet with suppliers etc.
- Creation of fictitious employees and their expenses
- Collusion with external parties
- Intellectual property protection, data protection
- Methods for detecting corruption and fraud:
- Adequate Project Management Plan including Fraud Risk Assessment, Controls Assessment and Implementation of Anti-Fraud Controls to prevent and monitor / detect fraud & corruption
- Conduct fraud audits: standard audits are not always designed to detect fraud and the auditors do not always know which data that they need to look at
- Encourage and facilitate reports / whistleblowing hotline
- Diligently perform inspections when dealing with contractors / consultants
- Ensure that proper due diligence is performed on third parties (consultants, agents, joint venture partners etc.)
- Other possible action to consider: understand the terms of your contracts and consider amending certain provisions with regards to which law and jurisdiction governs the contract, any changes that occurred in the law as well as currency changes. This can be done using Smart Analytics.
When “business as usual” is disrupted, either by concrete events or assumed impending events such as Brexit, this can often create an environment with opportunity and high incentive to defraud to maintain income and reported earnings — both at a personal and organizational level. Senior management needs to ensure that adequate follow-up of control breaches occurs. Where fraud is suspected, they should move quickly to substantiate or disprove the allegations as well as remediate accordingly. A well-defined fraud contingency plan can help companies respond quickly, establish responsibilities and reporting requirements and when to seek assistance from legal or other external advisors. In this uncertain environment, business must continue to demonstrate their commitment to ethical business conduct, management will not only be protecting assets of the organization but positioning the company to seize opportunities in adversity.