Organisations spend thousands of pounds every year protecting themselves from external fraudsters, but could the pandemic increase the threat from within?
Businesses have long contended with employee fraud, from false expense claims to data theft. But for some experts, Covid-19 could deepen the danger.
The pandemic has driven a widescale move to remote working. When combined with the significant economic and social impact of the virus, some believe this could boost the conditions for internal fraud.
The risks were on stark display in a June 2020 survey by Crossland Employment Solicitors, which found that more than a third (34%) of UK employees had been asked by their boss to work while being furloughed by their company, an act of fraud under the Coronavirus Job Retention Scheme.
The triggers of employee fraud
In its 2020 Report, the Association of Certified Fraud Examiners estimated that 5% of all revenue generated by organisations, or around £3.5 trillion globally, is lost every year through employee fraud. The “fraud triangle” theory outlines the three components that help drive such behaviour: pressure or incentive, opportunity, and rationalisation.
Covid-19 could have a dangerous impact in some or all of these areas. For example, personal financial pressure has been much in evidence as people grapple with an uncertain employment landscape, says Richard Hunt, founder and managing director of Turnkey Consulting, a risk management consultancy. “By December 2020, nearly 9 million people had to borrow more money because of the pandemic,” Hunt says.
Working from home also feeds the opportunity channel, allowing unusual behaviour patterns to go unnoticed while removing the support that comes with regular face-to-face contact and check-ins. Furloughs and redundancies put additional pressure on remaining team members, not just in terms of workload, but also in changes to organisational roles and processes. This can create potential conflicts in an employee’s responsibilities.
“It may be that instead of one person ordering goods and another receiving and paying for them, the two tasks now fall to one individual,” says Hunt. “With the all-important segregation of duties removed it’s an easy step for this person to process payments for goods they might have ordered themselves.”
And for employees who are really struggling financially or facing some large one-off expenses, rationalisation might come easy. It could be simple enough to justify fraudulent actions as short-term borrowing from an employer that will be repaid the following month. But if the organisation fails to detect the fraud, the employee might borrow more – without making a repayment.
Prevention, not cure
Employee fraud isn’t always the result of malicious intent. Sometimes it stems from desperation, incompetence, or even ignorance. However, it always requires sensitive handling by business leaders.
In the current economic climate, employers have shown greater sympathy to the pressures that employees face in terms of money and wellbeing. However, these sympathies may not extend to those acting dishonestly, irrespective of any personal factors behind the behaviour.
The most effective approach is to focus on prevention, rather than cure, says Catherine Kerr, employment law partner at Primas Law. For most employees who feel driven to behave in a way that is inappropriate and out of character, there will be a build-up leading to a tipping point, she says.
“Employers who interact with their team and embrace mental wellbeing as part of their culture are more likely to identify these problems before they get out of hand,” Kerr says. “And an employee who feels supported is less likely to be pushed to act in a way that runs contrary to the employer’s best interests.”
While employee education can help minimise the risk of external fraud, it is less likely to deter internal fraud; employees who behave fraudulently will in most cases already understand the impact of their actions. “Organisations should focus on creating a supportive working environment in which an employee can look to their employer for help and understanding in challenging times,” adds Kerr.
Measures to minimise internal fraud
Employers can take steps to minimise the risk of internal fraud. For example, they could implement robust anti-fraud policies, reinforce a zero-tolerance policy and confer accountability on everyone in the organisation. Regular evaluations and effective performance reviews through appraisals should highlight a change in character, a decline in performance or evidence of financial difficulties, all of which can indicate potential problems.
Sometimes employees are coerced into fraud by colleagues or line managers. In some cases, they may be aware of fraudulent activities but fear to report them. It’s important to introduce a confidential communication channel for whistle-blowers, says Andrew Durant, senior managing director at FTI Consulting.
“If they don’t feel safe they won’t step forward,” Durant says. “Most frauds are detected by tip-offs. Employee education on the risk of fraud, and how fraudsters may target them or the business, is key to preventing and detecting fraud.”
What should be done if internal fraud comes to light? The first step is to mobilise HR, keeping the number of individuals involved to a minimum to avoid any unintended amplification of the issue. The relevant individual should then be interviewed, with the intention of putting the allegation to them and learning why they may have committed fraud.
This may result in the termination of the individual’s employment. However, the process will help the business understand the underlying issues that led to the fraud or may be present across the organisation, “and put in place changes or controls to ensure that the situation isn’t repeated”, says Iskander Fernandez, partner and fraud expert at BLM.