Like a perfect storm, the likelihood of fraud occurring exponentially increases in the presence of a certain set of circumstances. Geopolitical changes, such as Brexit for example, has caused much discussion, angst and uncertainty – thus creating the perfect storm for fraud. Rain, thunder and lightning are not needed but the clouds impeding the horizon may be enough to entice otherwise good employees to commit fraud.
The uncertainty around Brexit can be compared to the same environment that businesses 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 paychecks and your company’s stock price, would you engage in unethical business activities?
The consequences of Brexit for business have been talked about, debated and hypothesized. – But very little was mentioned on how this disruption to “business as usual” and feared outcomes can lead to the opportunity for fraud and corruption – if adequate controls are not in place to ensure good governance.
Why do fraud and corruption happen?
Fraud happens when opportunity, pressure and rationalization collide. For instance, with increased pressure and decreased internal controls due to the elimination of “non-essential” positions (such as auditors and compliance staff), individuals may justify inappropriate behavior when in (perceived or actual) dire straits. Companies that are restructuring may have an immediate effect on internal controls – this offers opportunity. Declining stock prices or possible impending layoffs may 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 convergence of these three elements, similar to the barometer dropping, the wind increasing and the clouds covering the sky – all signs of impending trouble.
While the storm of uncertainty is brewing, companies can look at some risk areas to manage the current situation:
- Contractors, consultants, advisors:
- Tax fraud: Filing wrong tax statements to protect margin and profitability
- Customs fraud: Falsifying transport documentation for a “smooth” customs process
- License fraud: Providing wrong information to obtain licenses required or to speed up the license process
- Paying bribes to win contracts or licenses
- Flagrant theft
- Local project partners:
- Asset misappropriation: Duplication of payments, alterations of and tampering with invoices and other supporting documents, alteration or duplication of accounting records (“creative book keeping”), misuse of funds, unreported discounts, unauthorized use of project or company property, and excessively high operational expenditures
- Expenses fraud: Unnecessary foreign travel to meet with suppliers
- Creation of fictitious employees and their expenses
- Collusion with external parties
- Intellectual property protection and data protection
Some methods for detecting corruption and fraud:
- Adequate project management plan including fraud risk assessment, controls assessment and implementation of anti-fraud controls to mitigate and monitor or detect fraud and corruption
- Conduct fraud audits: Standard audits may not always be designed to detect fraud
- Encourage and facilitate reports or a whistle-blowing hotline
- Diligently perform inspections when dealing with contractors or consultants
- Conducting proper due diligence on third parties (consultants, agents, joint venture partners, etc.)
- Other possible actions to consider: Understand the terms of your contracts and consider amending certain provisions with regard 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 commit fraud. This may be done 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, businesses must continue to demonstrate their commitment to ethical business conduct. Management should not only protect assets of the organization but also position the company to seize opportunities in times of adversity.