The current COVID–19 pandemic has created the perfect storm of opportunity, pressure and rationalisation, all elements that contribute to the incidence of fraud.
With jobs, and the future of the business potentially being on the line, an environment exists whereby fraudulent activities could be rationalised by the perpetrators.
Changes to the work environment such as working from home, changes in roles and access to systems can create incentive and opportunity whilst management and business owners are also under pressure to keep the business afloat.
What are 2 types of accounting fraud?
There are two types of accounting fraud that could arise from the COVID-19 pandemic:
1. Lower-level Fraud
This is where an employee, customer or outsider siphons money from accounts payable, payroll or other parts of a company where money is being transferred or moved.
Normally, internal controls and financial governance practices should be in place to mitigate this risk. However, these may be compromised by changes in working conditions resulting in less oversight than would normally be the case.
2. Financial Reporting Fraud
Pressure on management to maintain performance, meet covenants and to keep the business afloat will often rationalise a financial misstatement.
The large amount of government assistance available such as JobKeeper, the eligibility criteria for which is based on financial performance at a period of time can lead to aggressive accounting policies and estimates.
Rationalisation for financial misstatements can include professional judgement used to arrive at aggressive accounting estimates in relation to asset valuations, impairment assessments or provisions for losses to meet eligibility criteria for government COVID19 assistance.
Similarly changes in the treatment of revenue (e.g. deferment of sales) can often be rationalised when assessing eligibility for assistance.
Businesses are largely concerned in this instance with keeping afloat and financial oversight can often be reduced or disregarded.
What steps can I take to reduce the risk of accounting fraud?
Prevention is always better (and less costly) than a cure. All businesses should undertake a fraud risk assessment, and this should be regularly reviewed and updated. COVID-19 has increased the risk of fraud and policies and procedures should be updated to continue to mitigate this risk.
It is also important to ask yourself the following questions:
Has your business completed a fraud risk assessment?
If so, has your business revisited it since COVID-19?
If the answer to any of the above is no, then you need to consider how you might overcome the risk of fraud occurring in your business. The Davidsons team is here if you require assistance in developing a fraud risk mitigation strategy. For more information contact your Davidsons team member. Alternatively call us on 03 5221 6399 or email us at info@davidsons.com.au for more assistance.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.