When the Economy Dives, Accounting Fraud Soars, Survey Claims

Money Morning Staff Reports

Fraud increases when the economy takes a downturn, which is why nearly two-thirds (63.3%) of executives polled expect accounting fraud to increase during the next two years, concludes a recent online poll conducted by Deloitte Financial Advisory Services LLP.

"While fraud is committed during strong economic conditions, it is clearly exacerbated in declining markets," said Kerry L. Francis, chairman and national leader of Deloitte Financial Advisory Services LLP's Corporate Investigations practice. "Smaller paychecks, reductions in employee headcount and internal controls, as well as diminished morale, are just a few factors that can open the door to fraud in a down market."

More than 1,280 executives from the banking and securities, financial services and technology industries responded to the polling questions during a Webcast entitled: "Financial Fraud: Does an Economic Downturn Mean an Uptick?"

Industries experiencing the greatest risks for potential accounting fraud during downturns include:

  • Computer.
  • Retailing.
  • And such service-related industries as telecom and healthcare.

Historically, fraud schemes attempted during a downturn include the manipulation of such financial categories as revenue recognition, reserves and inventory or cost of goods sold. Additional potential fraud schemes in this economic downturn may include improper or omitted disclosures in financial statements, as well as unreported violations of the Foreign Corrupt Practices Act (FCPA).

To prepare for the risks that a downward economy poses, 45.7% of respondents indicated their organizations have established protocols for conducting investigations.

Executives also report that they would seek assistance from such initiatives as:

  • Fraud-awareness training throughout organizations (38.7%).
  • More robust fraud-risk assessments (21.5%).
  • And expansion of internal audit monitoring efforts (20.3%).

"Strong anti-fraud programs and controls can reduce fiscal, investigative and reputational costs," said Donna Epps, a partner and national leader of Deloitte Financial Advisory Services' Anti-fraud Consulting practice. "It is important that controls are created, implemented and monitored to mitigate fraud. Clearly communicated, written guidance helps promote an integrated fraud prevention program across all levels of an organization."

Some leading practices Deloitte recommends to help companies mitigate fraud risk include:

  • Updating fraud risk assessments regularly to reflect current conditions.
  • Clearly defining anti-fraud program roles and responsibilities of the board, the audit committee, company management and line employees.
  • Setting a positive, anti-fraud tone at the top by communicating consistent expectations for all employees.
  • Establishing and maintaining an effective whistle-blower hotline, which is accessible and confidential.
  • Continuing fraud awareness through regular training.


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