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Fraud Increasing During Recession

Intense financial pressures during the current economic crisis have led to an increase of fraud, as pervasive layoffs are leaving holes in organizations' internal control systems.

Those are the findings of a survey conducted by the Association of Certified Fraud Examiners in February and March 2009. Employee embezzlement (defalcation) is the most common type of fraud being committed and has been on the rise, according to the survey. Further, 70 per cent of the survey respondents believe that the incidence of employee embezzlement will rise during the coming year.

Mounting financial pressure was cited by almost half of the respondents as the biggest contributing factor of the increase in fraud, followed by an increase in opportunity, and then rationalization.

The three contributing factors correspond to "The Fraud Triangle," The Fraud Triangle illustrates the significance of the three factors, which pertain to the current economic recession as follows:

Increased Pressure/Incentive
The struggling economy has placed many businesses and employees under growing financial strain. Increased financial need will increase the incentive and motivation for fraudulent behavior (e.g., "My home value has declined, and my line of credit has been canceled." "My retirement funds shrank." "I need this money.")

Understanding the gravity of these pressures on employees is crucial to effective fraud prevention. Employers who proactively support staff members in this time of need - through measures such as employee counseling services, open-door policies, and employee assistance programs - may be able to mitigate the pressures and deter employees from turning to criminal activities.

Perceived Opportunity
Organizations in nearly every sector are cutting expenses and laying off workers. Layoffs and reduced expenditures can lead to fewer fraud prevention measures as well as holes in the organizations' internal control systems. The perceived opportunities for employees to steal could then proliferate.

"When people perceive an opportunity to commit fraud and get away with it, they're more inclined to try it," said Duncan Will, CPA/ABV/CFF, CFE, CAMICO loss prevention accounting and auditing specialist. "The good news is that CPAs can often convince their clients to implement steps to discourage their employees, customers and vendors from believing such opportunities exist."

Establishing strong internal controls will help remove the perception of opportunities to commit fraud. Strong controls notify people that fraud will likely be detected and will not be tolerated. Controls are enhanced when people are encouraged and feel comfortable about coming forward to confidentially express their fraud risk concerns via whistleblower hotlines or similar communications tools.

When people are bombarded with bad financial news, they are prone to morale problems and a heightened sense of fear, pessimism, helplessness and isolation. This may, in turn, allow individuals to rationalize previously unthinkable acts, according to the ACFE. Rationalization is the justification for fraudulent behavior. Examples include:

  • "I'm entitled to this because ever since they laid off Larry, I've been doing his job in addition to mine." "I didn't get a raise, and I should have."
  • "I'll return the money once I get my debt under control and my employer gets back on track and gives me a raise."

Employers need to be vigilant about maintaining a strong tone at the top and the right ethical foundation. Anti-fraud controls are also essential and fall into two categories: preventive controls and detective controls.

Examples of preventive controls include:

  • Employee support programs
  • Fraud training for employees and managers
  • Segregation of duties

Examples of detective controls include:

  • Fraud hotlines
  • Internal audit department
  • Independent audits

Examples of inadequate controls that are often exploited include:

  • Lack of segregation of duties
  • Minimal monitoring or oversight
  • Inadequate asset safeguards
  • Misunderstood controls
  • Controls that are easily overridden

"Sometimes controls are in place, are being adhered to, and are being monitored, but the controls are flawed," said Will. "Someone who is qualified to evaluate controls should assess whether they are flawed or adequate."

CPAs always need to be skeptical and cautious when controls are overridden, regardless of the engagement. Warn your clients that even if they override controls without fraudulent intent, they may be creating the pathway for others to follow their lead, perhaps with fraudulent intent. Always document the warnings you make to clients. Documented warnings provide a strong defense against future fraud claims.

The ACFE survey report is available at  


16 Tips to Avoid Fraud

#10 - Access to personnel and vendor master file records should be password protected and restricted by job function.

Send an e-mail to to request your practical checklist of "16 Tips to Avoid Fraud".  


16 Tips to Avoid Fraud

#10 Access to personnel and vendor master file records should be password protected and restricted by job function.

Send an e-mail to to request your practical checklist of "16 Tips to Avoid Fraud".  


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