How the Pandemic Highlighted Corporate Fraud Risks
As businesses, we learned a lot as a result of the COVID-19 pandemic, including how to better prepare ourselves for a day when operations may be disrupted again and employee workforces become physically separated for months or even years. The pandemic also reminded us of the risk of financial statement fraud and the increased importance of strengthening company internal controls over financial reporting.
Fraud: Contributing Factors
It’s not uncommon for economic crises – such as those associated with a pandemic – to spawn cases of fraud against a business. While companies are reeling to make quick decisions as revenues are potentially declining, fraudsters often take advantage of the abnormal conditions and expose vulnerabilities within an organization’s internal control environment.
- Financial Stimulus: With economic relief vehicles funded at federal, state and local levels – including the Paycheck Protection Program, disaster loans and others – many companies added new funding to their general ledger. However, given the emergent onset of the crisis, as well as the issues many of these programs had rolling out the funds, some companies were not adequately prepared and may not have properly tracked and recorded the funds they received. Without careful and accurate recording and reporting, it would have been easy for funds rolling in from various sources to slip through the cracks and for malicious employees to access dollars intended for the business.
- Workforce Reductions: Many businesses were forced to reduce their staff due to the impacts of the pandemic, and any workforce reduction scenario can lead to disgruntled employees. Additionally, formalized termination processes may have been lacking, resulting in those same employees retaining access to a business’ core financial system(s).
- Resource Shifts: Alongside workforce reductions also come shifts in resources and responsibilities, often resulting in disruptions to everyday processes and procedures. If remaining employees are taking on more work and responsibilities, it could easily lead to operational gaps and internal control breakdowns.
- Remote Operations: The sudden transition to remote office settings may also have played a role in increasing fraudulent activity. New workflows to accommodate processes performed virtually coupled with less oversight may have unknowingly created opportunities for internal or external resources to take advantage of.
Strengthening Your Internal Control Environment to Mitigate Fraud
The best defense against fraud is an effectively managed internal control environment. Companies need to have processes and procedures that mitigate opportunities for employees, former employees or relationships unknown to access or disrupt their financial operations.
Companies should consider adopting the following practices for their Internal Control Environment:
- Establish clear workflows, policies, processes and procedures, including establishing segregation of duties.
- Safeguard financial information through access controls for both on-site and virtual environments and applications.
- Streamline offboarding and termination procedures to prevent unnecessary and unwanted access.
- Document processes and procedures to educate employees on the potential consequences of unauthorized access or fraud.
- Work with a third-party provider to assist in the performance of regular internal audits of your internal controls over financial reporting environment.
MFA’s Risk Advisory Team has deep knowledge of and extensive experience in internal controls, business/IT process improvement along with fraud investigations and can assist companies in both responding to and mitigating current and future fraudulent activities. Please connect with us to learn more.
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