Whether Covid-19 Pandemic is causing more Risk for Fraud?

Whether Covid-19 Pandemic is causing more Risk for Fraud?


Till last year, all of us have enjoyed growth in economy, improvement in industrial and agricultural output, increase in import and export, improvement in service sector revenue and employment rate too. As we know that, growth is essential for maintaining the operating efficiency of infrastructure like increments and promotions to retain the black horses and beating inflation etc.

Year 2020 was compared with a year where all works were expected to be done quickly like scoring runs in 20-20 cricket match but Corona pandemic have created disaster not only in Indian Economy but worldwide and reversed all forecasts. Everywhere we are seeing lock-down, massive job loss or pay cut etc. Although few market players trying to improve their top-line by selling innovative immunity boosters even in toilet soaps.

This distress in supply chain is treating for unprecedented de-growth in economy. Slowly slowly it is resulting in to unrest and peoples trying innovative ideas i.e. good and bad both. For example, India is trying to be a self-reliant nation and has genuinely wanted to reduce its import. Let us see how efficiently our Entrepreneurial section takes it into action.

For couple of weeks, we are observing sudden increase in online fraudulent/hoax mails/message. Where people are being informed that they have won some cash prize, award, rewards etc. Instances of kidnapping and suicide etc have been noticed. Now question arises that whether Corona pandemic have given more rationale to anti-social elements for fraudulent activities?


Fraud Triangle

As we know that there are three factors or circumstances leading to fraud. It is popularly known as fraud triangle. These 3 are-

1) Motive – This is the underlying cause of any fraud. No doubt Covid-19 have given financial pressure on everybody. This financial pressure might be in the form of default in payment of earlier financial commitments or sudden loss of earnings or any emergency medical treatment.

2) Opportunity -Weak internal controls like absence of formal policies and procedures, maker checker concepts, segregation of duties, inadequate supervision, absence of effective internal audit etc provided ground of fraudulent practices. In generally controls are breached incidentally once later it becomes easy target for fraudsters. In practical we have observed instance of fraud even in well organised establishments too but instances were more frequent where controls were weak.   

3) Rationalization -It is the tendency of fraudsters to justify their action through various ways. It may be in form of revenge or anything through which they do not feel guilty for their action. In practical people come with innovative rationals. 

It is need of the day to have strong controls to prevent opportunity to commit fraud. An ethical atmosphere usually discourages fraudulent behavior. Any report on an employee’s high life style is not supportable by known sources of income need to be investigated and justified.


Fraud and Controls

Some important areas of control are given below which need to be completely implemented.

Employee Related – Reference check, job rotation, minimum mandatory vacation.

Process Based-Segregation of duties, approval hierarchy, review of accounting records and effective audit of all processes at regular intervals.

System Related – System access controls, System enforced authority limits, change management and review of unusual events auditing trails.

It is equally important to understand that no control is infallible. It is subject to human exploitation. So, setting up a strong control is not an overtime effort. It is a ongoing exercise to review and update. Controls are vital first line of Defense against frauds, but are not fool proof forever. So, testing of fraud controls is always recommended. 


Red Flags and Fraud Detection

The exercise of fraud prevention is ideal but not so easy therefore early detection of fraud and timely corrective action is the need of the day. Otherwise increasing tendency of frauds are going to be costly affairs for the organizations. In current economic scenario every internal auditor needs to give due focus on “red flags” commonly known as unusual transactions which might point to the existence of fraud.

Red flags may not be an absolute indication of fraudulent activity but it should not be ignored. Few red flags which might point out fraudulent activity in business is listed below-

Ø Unusual sales transaction to Inflated sales proceeds.

Ø Slow recovery from debtors, abnormal discounts and write-off of receivables.

Ø Increase in sales expenses without corresponding increase in sales.

Ø Stock accumulations or frequent shortage of items in warehouses.

Ø Poor vendor development process.

Ø Untraceable items in bank reconciliation. Unexplained journal entries.

Ø Old credit balances in vendor accounts.

Ø Disproportional increase in expenses.

Ø Missing accounting records.

Ø Non secrecy of passwords.

Ø Whistle blowers’ tips

Ø Flashy life style of an employee beyond known source of income.

In fraud testing’s even immaterial indications are also relevant and should never be ignored. Since it is very tough task to gather evidence of fraud and prove it on above mentioned 3 parameters i.e. motives, opportunities and rationale. 


Managerial Level Frauds

Although frauds may be done by any level of person but in generally managers and above level staff vested with authority may have significantly more opportunity for fraud since they are involved in management approval and override chain. Frauds engineered by senior personnel cause more damage than those done by junior level staff.

Senior level staff have additional pressure on performance parameters from the organization like growth in top line, better operating margin, full compliance to statutes etc, which prompt them to explore this route. However, while committing fraud they generally exhibit red flags. For example-

Ø Delaying of reports.

Ø Demanding personal loyalty from subordinates

Ø Living beyond means

Ø Unusual friendliness with outsiders like vendors.

Ø Developing outside business interest with conflict of interest with company.

In most of big scandals its top management which had initiated and caused fraudulent activity such as ICICI  Bank, PNB, Enron Satyam or Kingfisher.


What need to be done for Safeguard?

Since corona pandemic have given undue financial pressure to everyone so there is risk of Fraud becoming a part of normal human psychology and it need to be controlled through strict process level controls and strong audit mechanism. There are professionals in this field who are specialized in fraud detection and improving organizational machinery through process improvement and change management. To avoid any loss of reputation and legal complicity organizations need to avail their services wherever felt required.

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