‘A Perfect Storm for Fraud’ (Gwen Moritz Editor’s Note)

“Never let a good crisis go to waste” is time-honored advice, whether it originated with Niccolò Machiavelli or Winston Churchill before being popularized by Rahm Emanuel.

Politicians aren’t the only ones who recognize the opportunities presented by the current crisis. Fraudsters are also looking for ways to capitalize on COVID-19. Arkansas Attorney General Leslie Rutledge has warned about price gouging, while the U.S. Department of Justice has logged reports of fake cures, phishing emails from entities spoofing the WHO or the CDC, malware disguised as virus-related information and the ever-popular requests for donations to illegitimate or nonexistent charities.

I got an email allegedly from Amazon warning me that my Prime account had been suspended because I hadn’t paid my monthly fee. It didn’t work — first clue: I don’t pay Amazon monthly — but I can see how people more dependent than ever on online shopping and streaming entertainment could panic at the thought of a suspended account.

I hate fraud. I hate it whether it’s perpetrated by criminals who send phishing emails during pandemics or by Nigerian princes or by self-proclaimed billionaires who run scam universities and rip off charities. So it is with a heavy heart that I call your attention to this warning from Bruce Dorris, president and CEO of the Association of Certified Fraud Examiners: Like crises before it, from Hurricane Katrina to the financial crisis of 2008, the coronavirus pandemic is likely to be a breeding ground for workplace fraud.

“There are a number of reasons fraud proliferates during recessions and times of economic instability,” Dorris wrote in an open letter posted on the ACFE website on March 31. “A large factor is the increased pressure companies and their employees feel as they struggle to meet the challenges of a down economy.”

The most costly kind of workplace fraud is financial statement fraud, averaging $8.7 million. When market conditions deteriorate, Dorris wrote, executives “can face pressure to falsify their financials in order to meet earnings targets or secure financing.”

The current situation, negatively impacting every industry (except perhaps package liquor stores), may make such fraud less tempting than during normal, cyclical downturns.

But this would be a great time to be on the lookout for the most common type of workplace fraud: embezzlement, which fraud examiners call “asset misappropriation.”

In his letter, Dorris described the “fraud triangle,” which is “the most commonly accepted model for explaining fraud in the workplace.” The three factors that are generally present when an employee decides to start committing fraud are pressure, opportunity and rationalization.

Rationalization is fundamental to human nature, and anyone who has ever sold anything not essential to survival counts on it. But it can be a very expensive catalyst when the other factors are also in place — which they often were even be-fore the pandemic led to 17 million unemployment claims in just three weeks.

Previewing 2019 survey results that will be released on Thursday, Dorris said “42% of occupational fraudsters are living beyond their means at the time they commit fraud, and 26% are experiencing financial difficulties.” These are red flags that an employee is under pressure, the first factor in the triangle, and the pandemic will undoubtedly create additional desperation for many people.

The pandemic may also create greater opportunity for fraud, the second factor in the triangle. “Companies seeking to cut costs often target non-revenue-generating departments like compliance and internal audit. This is a mistake,” Dorris wrote. “… As organizations make cuts in the attempt to operate with a leaner staff, they can find themselves caught in a perfect storm for fraud: pressures motivating employee fraud are high at the same time that defenses intended to safeguard against fraud have been weakened.”

Quoting Warren Buffett — “You only find out who is swimming naked when the tide goes out.” — Dorris also predicted that the recession caused by the pandemic will reveal pre-existing frauds, just as the 2008 crisis uncovered Bernie Madoff’s Ponzi scheme.

The ACFE’s 2019 data shows that more than half of workplace frauds take advantage of deficient internal controls.

“[A]lthough business practices may not be top of the mind right now while we face these difficult changes,” Dorris concluded, “I encourage organizations to look towards the future to protect themselves, and their employees, against fraud. Because it’s not a question of if we see more fraud, it’s a question now of how much we will see.”

Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com and follow her on Twitter at @gwenmoritz.