TORONTO, Jan. 21 /CNW/ - The risk of unethical behaviour and the
potential for fraud are heightened in the current economic environment, says
Ernst & Young.
This is particularly true for companies with executives who have not had
previous experience in navigating the challenges of a global downturn.
"Fraud is about pressure, opportunity and rationalization. Economic
downturns bring in a perfect storm for each of those elements," says Mike
Savage, head of Ernst & Young's Fraud Investigation and Dispute Services
Savage highlights a few examples:
- Executives feel pressure to maintain earnings, meet debt covenants,
or even just to stay open for business.
- Cost-cutting initiatives can create opportunities for asset
misappropriation and fraud with the removal of key checks and
balances from the internal control system.
- It becomes easier for employees to rationalize fraud when they feel
alienated, are worried about job security, or when the incentive
compensation scheme pays out less.
He also notes that preventing fraud is far better than dealing with the
consequences, and that's why companies need to step up their efforts to fight
fraud. The issue must be top of mind for executives and boards of directors
alike. They should be alert and on the watch for red flags that may indicate
the risk of fraud. These could include employees living beyond their means,
results that appear out of line with expectations, or tolerance of wrongdoing,
among other things.
"Robust internal policies are a strong first line of defence. But on
their own, they're not enough to thwart would-be fraudsters," Savage explains.
"Companies need to communicate policies effectively throughout their
organization, monitor for compliance and enforce the policies with discipline.
Otherwise, they'll be left with policies that exist only on paper."
Savage says companies should weigh the price of anti-fraud programs
against the true cost of fraud, bearing in mind that the harm fraud inflicts
on an organization extends far beyond the actual financial loss to include the
reputation of the organization, which may never fully recover.
As boards and executives grapple with the many challenges they'll face in
2009, they must also focus on these three key areas:
- Understanding the priority fraud risks businesses face
- Determining whether the controls in place over these risks are still
adequate given the current business environment, which places a
premium on compliance and enforcement
- Establishing criteria to govern the escalation of allegations of
fraud internally to assure the appropriate level of oversight by
those charged with governance
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