Combating fraud in the global downturn (Sponsored)

May 13, 2020

By Fergal McManus, Account Manager, Ireland & Channel Islands at Confirmation

According to the European Commission, the economic impact of the COVID-19 pandemic will be "a shock without precedent since the Great Depression". It forecasts that the EU economy will contract by 7.5% in 2020.

Many companies across the world will suffer from significant problems in maintaining cashflow, liquidity and working capital. The management of failing businesses – particularly those operating in the worst-hit sectors, such as entertainment, property and tourism – will try to protect themselves from going under.

COVID-related fraud

What are the implications for auditors? We expect an increase in financial statement fraud, as stressed businesses seek to shore up valuations and protect their access to capital markets. With a median cost of almost one million dollars per fraud, this will be particularly damaging.

And current abuses of COVID-19 safety net funding have already been reported to the OECD, which is also acutely aware of the "risks related to fraud and financial misconduct by companies in their operations and supply chains”.

As well as encouraging fraud, the COVID-related downturn will bring many schemes that had previously gone undetected into the open. In the spring of 2000, the dotcom bubble burst which lead to the bankruptcies of once high-flying companies like Pets.com and eToys. Fraud and accounting scandals also helped bring about the failure of companies considered blue chip—such as Enron and WorldCom, and the fall of Lehman Brothers in 2008.

We have recently seen some potential major frauds come to light. NMC Health – the Middle East-focused healthcare group – admitted that its net debt was twice what it had disclosed, after it found almost $4 billion of borrowings that had been concealed from the company’s board.

In April, the Chinese coffee-shop chain Luckin reported an internal investigation led by independent auditors – they had discovered fraudulent sales of $310 million, allegedly involving the company’s COO and other employees.

Employee cooperation

Employment is becoming more precarious, with many staff already furloughed or dismissed. According to a British Computer Society webinar on cybersecurity, employees will be more prone to keep their heads down and refrain from whistleblowing about suspected fraud. Given that 40% of fraud detection is based on employee tip-offs, this reluctance will serve to exacerbate the difficulty of detection.

Beating fraud with the help of Confirmation

A further 19% of fraud is uncovered during audits. As the opportunities and motivation for occupational fraud increase, auditors will have to become ever more vigilant. And technology has an important role to play in helping them prevent and detect financial crime.

To obtain safe audit evidence and to combat the frauds flowing from the downturn, auditors will want to turn to technology such as Confirmation. Such a move will help tackle some of the 76% of occupational fraud that involves fabricating or doctoring physical documents.

Online audit confirmation requests are easy to initiate and respond to – even with audit and bank employees working remotely – as long as firms use confirmation platforms such as Confirmation to bring the entire process securely online.

Confirmation pioneered the idea of digital confirmations in 2000 and still leads the industry today. More than 16,000 audit firms, 4,000 banks and departments, and 5,000 law firms have put our platform to work. They span 170 countries and process more than one trillion dollars in confirmations each year.

(This article is sponsored by Confirmation.)