The effects of fraud on businesses in the economic downturn

1. Many businesses are feeling the effects of the economic downturn and in their attempts to minimise losses, often they unknowingly open themselves up to huge financial and reputational risks. This is due to the fact that when companies cut back on costs, they often increase their chances of being victims of fraud.

2. According to various reports, fraud is South Africa’s number one economic crime and considering that fraud accounts for 7% of company revenue worldwide, any further increases in this figure could prove detrimental to an organisation in these difficult economic times. In South Africa alone, it is estimated that fraud costs the economy in excess of R2 billion a year.

3. Fraud is often explained in terms of the fraud triangle which describes that fraud is most likely to occur when there is an overlap of an incentive or pressure to commit fraud, the opportunity to commit fraud, and a rationalisation therefore.

4. In an economic downturn, the incentive or pressure to commit fraud is increased as, inter alia, financial pressures increase, unrealistic corporate targets are set, the desire to help the organisation succeed intensifies, and/or employees feel the need to impress employers as those around them lose their jobs. This may result in the fraudster defrauding the company for their personal benefit, or resorting to fraudulent actions on behalf of the company to ensure success for their organisation.

5. When tough economic times impact the company financially, this usually increases the opportunity to commit fraud. This is because in an attempt to reduce costs, companies usually resort to measures like retrenching staff (which may affect the segregation of duties doctrine), reduced training, abandoning checks and balances which may be in place, and/or cutting back on internal audits, amongst various other things. In such conditions, an organisation is susceptible to fraudulent behaviour from its employees both internally, as well as externally in transactions binding the firm.

6. As employees feel the effects of the recession, they also begin to find it easier to rationalise any corrupt doings. Companies often look to reduce any pay increases or bonuses and also delay promotions. This may lead to employees feeling resentful and being able to justify to themselves that the fruits of the fraud that they are committing are owed to them. Alternatively, they may convince themselves that it is acceptable as they are doing it to save a loved one or that it is the only option available. Some even believe that they are just “borrowing” or that everyone else is doing it and thus they are also entitled to do it.

7. Thus it is evident that during a downturn, the incentives and pressures increase, as do the opportunities to commit fraud, whilst rationalising the actions are made easier. The effects thereof are evident in both the actions of the organisation itself and the employees within the organisation.

8. Organisations resort to desperate measures to survive. This may result in the payment of bribes, misrepresentations being made to clients, the favouring of tenders, insurance claims being falsified and/or taking short-cuts.

9. Employees on the other hand may find themselves falsifying qualifications and references, stealing cash and stock, creating ghost workers, falsifying medical and other insurance claims, resorting to insider trading and/or falsifying suppliers’ details.

10. Latest indications are that insurance fraud has dramatically increased over the last year. The short term insurance industry in South Africa has noted an increase in insurance fraud of 12%. Currently there are various scams doing the rounds, ranging from car and house arson to medical identity theft, whilst consumers are being fooled into taking false car warranty extensions or bogus health cover.