by Jim Marasco , CPA,CIA, CFE Fraud Matters, Fall 2008

As the economy continues to falter, your organization, like many others, may find itself more susceptible to fraud. It is estimated that U.S. organizations lose approximately 7 percent of their revenues to fraud, according to the Association of Certified Fraud Examiners recently released 2008 Report to the Nation on Occupational Fraud and Abuse. In recessionary times, this figure may increase and organizations in specific industries may become more vulnerable. Is yours one of them?

Pressures of a Recession

Collective economic pressures are one of the key reasons for how and why fraud thrives. As of July 2008, the unemployment rate in the U.S. had risen to 5.7 percent – a full percentage point higher than the previous 12 months. Wholesale prices rose 9.2 percent over the same period, according to the U.S. Dept. of Labor. Driving those prices up are the costs of fuel, utilities and food. Interest rates had been on the rise, forcing those with variable mortgage rates to experience higher mortgage payments. These factors contribute to a perfect storm of pressures. Because of the nature of the problems people are facing, they may find it easier to justify their fraudulent actions. They may rationalize that stealing from their employer is justified when it comes to feeding their family or keeping a roof over their head.

Industries Hardest Hit

Numerous industries have found themselves more vulnerable to fraud in recent years.

Internal Threats

Organizations that have had to downsize their work force may be left with disgruntled employees and corresponding low morale. These employees are more inclined to steal the cash, inventory and fixed assets of the company. The price of gas has increased dramatically, costing employees more to get to work. Some employers, including municipalities and governments, are considering four-day work weeks to combat these costs and assist employees as they grapple with these costs.

External Threats

The retail industry is experiencing an increase in theft by customers. Customers seem to be most interested in stealing items that are easily converted to cash. Other companies are finding that they are becoming the victim of check fraud at the hands of perpetrators who have obtained their check stock, bank account numbers and routing information. It’s no longer a matter of “if your accounts become compromised, but when they are attacked.” As people become more desperate, their schemes become bolder, regardless of the consequences.

Managing Your Risks

If your organization hasn’t updated its risk assessment in a few years, now is the time. With the economic downturn and the steep increase in wholesale product prices, your company may find itself vulnerable in areas that have previously gone unnoticed. For example, if you maintain a transportation fleet, your steel parts and fuel are precious and valuable commodities. Those scrap pieces of copper and steel now need to be locked up because of their increased value. Food service operations must pay closer attention to food inventories. Retailers need to increase loss prevention efforts.

Safeguards

There is little we can do to control the stresses people have, or the justification they use for their actions. However, you can limit their opportunity within your own organization. Digital surveillance cameras have become very common and an effective tool in thwarting crime. Access card controls can track employees and identify their whereabouts, and also limit access to specific parts of your buildings. Basic procedures, such as reconciling bank accounts in a timely fashion and employing positive pay controls on your bank accounts, can alert you to illegal activity before it compounds. More organizations are finding that a top-to-bottom internal control review is the best first step in securing themselves from both internal and external threats. Call our firm to determine your best course of action. A recession could be the best time for your organization to evaluate its vulnerability.

• Construction and utility companies have seen their steel and copper materials pillaged by thieves.
• Safeguarding their inventory has become critical to protecting their organization.
• Insurance companies are seeing an increase in fraudulent claims.
• Banks are finding all types of fraudulent check activity along with unparalleled losses from failed mortgages that were made under false assumptions or by crooked mortgage brokers.
• Retailers are being pilfered by both customers and employees.

James I. Marasco, CPA/CFF, CFE, CIA Jim is a partner at EFPR Group. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFPR Group affiliate company). Article republished with the permission of CPAmerica.