Recession causes increase in fraudulent activities

Many employees budget on these and with sudden downturns, they suddenly find themselves with less than expected capital. This can often lead to illicit actions on the employees' part, says Manpower South Africa and clinical psychologist Dr. Giada Del Fabbro.

"There are various forms of fraud occurring in South Africa, but the most common are theft, financial statement fraud and bribery and corruption. A recent study by KPMG found that about 30% of their top clients in Africa said that employee fraud had the highest effect on their business," says Lyndy van den Barselaar, managing director for Manpower South Africa.

"The onset of the global economic crises and recession saw an increase in these and according to the Pricewaterhouse Coopers' Global Economic Crime Survey 2009, almost two out of three South African organisations said they were the victims of fraud in 2009, the year after the economic crisis began. 54% of these said that fraud in their companies had increases during this period.

Fraud is not limited to recessions

"The tightening of regulations implemented by banks and lending institutions sees less money available to borrow for those in tight situations. It also occurs due to one partner in a marriage or business losing their position, leaving the remaining breadwinner with heavier financial pressure. Furthermore, when management and in particular middle management, suffers from staff cuts, it leaves gaps for catching illicit activity," says Van den Barselaar.

"It does not however only apply to fraud occurring during the recessions, often, the increased scrutiny that finances go through during a recession will bring up earlier fraud that went unnoticed. Additionally, when the company's profits are endangering people's jobs, they'll not be as likely to look the other way. One person defrauding the company could mean someone's position and so they will be more likely to blow the whistle on fellow employers they suspect of fraudulent behaviour."

Rationalising fraudulent behaviour

The Pricewaterhouse Coopers' Global Economic Crime Survey found that 62% of economic crimes were committed by people inside the organisation, and 38% by external individuals. A considerable amount, 23%, of fraud cases were discovered due to informal tip-offs and a further 21% were discovered through official whistle blowing channels. Only 15% was discovered through risk management systems, while 18% was discovered by accident.

From a psychological point of view, many employees will actually rationalise their fraudulent behaviour. "You will always get a certain personality type which will lean towards this kind of behaviour, with a psychopathic tendency to exploit situations for their own benefit," says Dr. Del Fabbro.

"In times of economic difficulties, if there is a perception on the employees part that the spoils are unequal, such as that upper management is getting the benefits that are not filtering down, they will feel entitled to take it for themselves. During recessions it becomes more prevalent as it boils down to a simple fight for survival, where individuals have to fill basic needs. Then the levels of intensity increase as the individual feels more justified to do what they're doing even if it is illegal or fraudulent."

Look for tell tale signs

"It's important to look out for certain tell tale signs that may indicate fraud. For individuals, fraud is often signified by increased levels of stress, a lifestyle above their salary, personal financial problems, unwillingness to take leave and aversion to delegate responsibilities. Company financial indicators include a rise in cash transactions, large differences in expense claims, unexplained rising costs and increased customer complaints and refunds," states Van den Barselaar.

"Finance directors need to be wary of the increases in fraud during a downturn and the reasons for it. This will help in identifying areas and employees to scrutinise more closely when they find themselves in these situations. It's essential to be exacting with anti-fraud measures, to have effective reporting channels and to carry out checks often with proper detection mechanisms and data analysis," concludes Van den Bareselaar.