The phrase “survival of the fittest” continues to describe the present business environment.
During these tough economic times, contractors cannot become complacent. Instead, companies must continue to monitor and improve business processes in order to succeed.
For many construction companies, survival up to this point has required cutting costs and streamlining operations. Many employers were forced to make drastic, far-reaching cuts, including employee layoffs.
With fewer employees being asked to perform more duties, often without proportional compensation, controls designed to prevent or detect fraud are likely to be less effective. While personnel changes may be necessary to sustain profitability, complex fraudulent schemes are a potential downside, making the need for enhanced oversight more critical than ever.
Fraud Risk Factors
Individuals commit fraud for a variety of reasons. To maintain proper oversight, management must be aware of three risk factors that, along with human greed, combine to increase the probability of fraud.
The first factor involves incentives. When a company’s profitability decreases due to a drop in sales, employee commissions and salaries also suffer. Declining income may result in an incentive to commit acts of fraud because employees want to maintain or improve their present lifestyles. These incentives are more prevalent during a recession. Not only are small business owners experiencing financial stress, but so are their employees.
The second factor is rationalization. Some employees convince themselves that “they are only borrowing the money” or that “it’s for a good cause.” Workers who rationalize their behaviors present a major risk in a difficult economic climate and present a challenge to individuals charged with oversight. The rationalization of fraud often occurs when an employee is under the pressure of mounting debt.
The third factor is opportunity. Opportunity to commit fraud increases when effective controls and proper oversight are lacking in the workplace. When cost-cutting results in fewer jobs, fewer checks and balances exist. Under this scenario, employees have more opportunity to commit fraudulent acts.
Be Proactive
The current economic and political climate set the scene for major increases in fraud. The long term is difficult to predict, but experts agree the economic sandstorm that has blanketed employers will not subside anytime soon.
Businesses must be proactive in combating the global slowdown, as they are unlikely to be able to conduct operations as they did in the past. However, these changes will inevitably produce new opportunities. Take this time to review current policies and procedures, and contact the company’s CPA to discuss setting up effective controls and oversight in this difficult environment.
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Wednesday, February 8, 2012