"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."
Industries experiencing the greatest risks for potential accounting fraud during downturns include: computer, retail and other service industries such as telecom and healthcare. Historic fraud schemes during a downturn include manipulation of 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 and Foreign Corrupt Practices Act (FCPA) violations.
To prepare for the risks that a downward economy poses, 45.7 percent of respondents indicated their organizations have established protocols for conducting investigations.
Executives also report that fraud awareness training throughout organizations (38.7 percent), more robust fraud risk assessments (21.5 percent) and expansion of internal audit monitoring efforts (20.3 percent) would most assist their organizations' fraud prevention efforts in the face of the current economic environment.
"Strong anti-fraud programs and controls can reduce fiscal, investigative and reputational costs," said Donna Epps, 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
More than 1,280 executives from the banking and securities, financial services and technology industries responded to the polling questions during the webcast, which was titled "Financial Fraud: Does an Economic Downturn Mean an Uptick?"
As used in this document, "Deloitte" means Deloitte Financial Advisory Services LLP and Deloitte Services LLP, separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.