Recession Fraud

There is a definite rise in the incidence of employment fraud during a recession, though this will often only come to light in the months and even years following an economic downturn. Some employment fraud however will be discovered during the downturn, as hard pressed companies take a closer look at their finances and discover losses might have been taking place.

Recessionary pressure affects employers as well as employees. Cutbacks have to be made and it is often the case that a company is in constant review of its finances, looking for ways to survive let alone grow and make profits. There will be constant talk of “tightening of belts” and likely rumours of redundancies – even if these do not actually take place. This has a knock on effect on the employees, many of whom will start to feel insecure in their jobs.

This leads to one of the drivers of employment fraud due to economic downturn. There is a decreased loyalty shown to the employer because of the real or imagined layoffs. This can result in some seeing the opportunity for compensation in the form of helping themselves fraudulently! This tendancy is even more marked if there have been reductions in pay levels or even cuts in overtime opportunity.

The second cause of employee fraud during an economic downturn is the financial hardship experienced by the employees families generally. Even if the employee is secure in his own position, a family member might have lost their own job and household income is reduced. It might even be perceived pressure from the need to save more in case of much greater hardship in the future.

The third clear driver in the increase in employee fraud during a recession comes from the cost cutting excercises that an employer might be taking. Very often non essential positions are cut. These tend to be the middle management levels, not the productive workers and not those in ultimate charge. The trouble is that this is the layer of management that effectively controls fraud within a business. It is the layer of supervision, the division of duties and monitoring that creates a secure financial system. Remove some or all of this and large windows of opportunity for the fraudster can appear. It often happens that internal audit and dedicated fraud prevention functions are seen as non essential and down sized accordingly.

With an increase in employee fraud and a reduced capability to deal with it, when a fraud does occur a company might find itself in the position of having to call in specialist fraud investigators. The cost of employing a fraud investigator in a recession is an added burden in trying to out ride the downturn.

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