Pressure and Rationalization: Watching for employee fraud over the holiday season

by Scott A. Koman

 

As employees continue working from home – and the impact of COVID-19 continues to drag down sales and normal performance expectations – businesses need to keep an eye out for problems within and without. 

Employee fraud has always been a “problem within” concern, but pandemic-caused pressures could exacerbate the issue. From workers paid on commission feeling driven to inflate sales, to nonprofit supervisors concerned about making it appear they spent “use it or lose it” grant money, COVID-19-caused pressures may tempt usually loyal and trustworthy staffers.

Criminologist Donald Cressey said that even the most trusted employee facing financial distress could rationalize stealing from their company under certain circumstances. He warned that three factors could lead to employee theft:

1. Opportunity
2. Pressure
3. Rationalization

Organizations need to consider all three sides of the fraud triangle. Companies too often forget pressure and rationalization when designing and adjusting internal control systems to remove opportunity.

Almost every organization has experienced some level of angst in 2020. For many organizations, desperate times have called for desperate measures such as layoffs, shutdowns, and disposals. Employers should anticipate that some employees may feel desperate enough to consider fraud.

Preventing employee fraud through internal controls

Internal controls should be adaptable. Processes have likely changed substantially throughout 2020 and necessitated many changes to internal controls. The expectation that employees may be desperate this year-end/holiday season could warrant additional adjustments.

Assess each of the five components of the internal control system to identify needed adjustments. Potential adjustments to consider for each component are listed below:

1. Control the work environment: Reinforce a strong tone at the top. Employees may find it difficult to rationalize defrauding an organization that has exhibited strong leadership and treated employees respectfully during a difficult time.

1. Conduct employee risk assessments: Identify high-risk employees and increase control activities and/or monitoring over these individuals.

1. Reevaluate year-end control activities: You probably have already tweaked daily, weekly, and monthly control activities during several months of altered operations. Now consider how to tighten year-end controls, such as annual inventory counts, year-end journal entries, and financial statement preparation.

1. Update communication methods: Increase the frequency of communication. Perhaps monthly staff meetings were appropriate in an office setting, but it is easy to forget how much contact occurs informally in offices, hallways, break rooms, and parking lots. Weekly staff meetings may now be the optimal frequency.

1. Increase monitoring: Increasing monitoring when employees feel increased pressure to commit fraud can act as a valuable deterrent.

To learn more, please visit 5 red flags of fraud businesses need to know during the COVID-19 shutdown and Teleworking and COVID-19: 4 ways to avoid cyberthreats.

If you have questions on how to safeguard your accounting procedures or are interested in a forensic analysis, the Boyer & Ritter team is ready to help.

A little oversight and care can keep what has already been a challenging year from becoming worse — and ensure peace of mind over the holidays.

Scott A. Koman, CPA, CFE, MAFF, is a manager with Boyer & Ritter LLC, where he is a member of the Advisory Services Team. Contact Scott at 717-761-7210 or skoman@cpabr.com