As the United States economy continues to falter, one common question is whether the difficult economic conditions will cause more fraud. Many experts are saying that fraud is very likely to increase, but I’m not so sure. No on can really prove this one way or another, but it’s still important to discuss the issue.
A recent poll done by one of the world’s largest auditing firms shows that almost two-thirds of executives believe accounting fraud will increase over the next two years. They attribute that increase to the economic downturn, specifically lower or non-existent raises and bonuses, reduced job security, and lower morale.
Of course, difficult economic conditions might give employees more of a reason to commit fraud. If an employee can’t pay his bills, he could turn to fraud. But will he? Will the fact that more individuals are experiencing financial stress result in more actual fraud?
And the statistics might support the theory that fraud increases when the economy goes down.
Statistics tracked by the National White Collar Crime Center demonstrate that arrests for fraud and embezzlement go up during economic downturns. But it’s not clear more arrests are a result of more frauds being committed, or because of some other factor.
I submit that it is quite possible that more frauds are not committed during economic downturns. It might just seem that way because consumers are more focused on negative financial stories. There are other possibilities as well.
Maybe technological advances mean that we’re detecting more frauds than before, even though fraud could be occurring at the same rate it always has. Maybe we’re just hearing more about fraud, thanks to regulations like Sarbanes-Oxley. Maybe the explanation is the way we get our information. The Internet means we have access to more news than ever before, so maybe we’re simply hearing more stories about fraud because we’ve got more exposure to news in general.
Another possibility is that companies could be more likely to pursue cases of fraud when finances are tight. Difficult financial conditions often cause companies to look more carefully for cost-cutting measures. Maybe in the past, certain cases of fraud might have been overlooked, but now they are pursued aggressively in the hope of recovering some of the proceeds.
Although two-thirds of executives think there is a higher risk of fraud during difficult economic times, most of them are not acting in response to this belief. Only about 20% of the executives questioned said they were increasing fraud prevention measures like increasing fraud risk assessments and enhancing monitoring. The lack of action on the part of management is interesting, especially since they so clearly believe that fraud risks are up.
There’s a chance that the economy may be a catalyst for more employee fraud. There’s probably an equal chance that it is not. We will never be able to prove either argument. But it is still important to talk about the issue. By educating employees about fraud risks, companies can reduce their overall exposure to occupational fraud schemes. Companies should be carefully monitoring fraud at all times, regardless of speculation on the economy’s impact on fraud rates.