Risk Trends in 2024 and Beyond: Fraud and Corruption

How much has the cost of living increase impacted fraud risk?

All Canadians have experienced significant increases in the cost of living throughout 2022 and 2023 due to rampant inflation and interest rates at their highest level since before the 2008 financial crisis. Some have been particularly hard hit. MNP’s July 2023 Consumer Debt Index revealed that 52 percent of households were $200 or less away from financial insolvency, and more than a third already didn’t make enough to cover their monthly living expenses.

While leaders are right to be concerned about their employees’ well-being and welfare, organizations should also be keeping a watchful eye on the increased risk of theft and fraud within the business.

There are typically three factors which influence the likelihood that a fraud will occur, two of which have been significantly elevated over the past 18 months. One is pressure; the perpetrator feels compelled to commit fraud because they need the money. Another is rationalization; the perpetrator convinces themselves the ends justify the means.

Given the economic drivers and other (often personal) factors at play, senior leaders and internal auditors will find it difficult to mitigate those first two elements of the fraud triangle. However, it is still important to recognize that these are elevated right now. That makes it even more critical to understand and manage the third determinant of fraud, which is opportunity.

Remote work, incomplete policies, poor training, and ineffective controls can all increase opportunities for fraud to occur. Regular risk assessments should seek to identify additional opportunity-related fraud risks unique to the organization.

Taking steps like requiring dual signatures for large transactions, using AI tools to monitor for suspicious activity, and restricting login access to the smallest number of individuals can all help to reduce fraud. Providing fraud training and encouraging team members to report suspicious activity has proven extremely effective.

Key questions to ask

• Are you aware of how much pressure the current economic conditions have had on your employees and third parties? Is there anything you can do proactively to help reduce this pressure related to the cost of living (allow remote working, etc.)?
• Have your organization or peers experienced an increase in fraudulent activities?
• Have you conducted a fraud risk assessment recently?
• Do you have experts in fraud investigation? Often, forensic experts are engaged to assist with investigations. Do not assume internal audit has this expertise.
• Have you ever used advanced data analytics to detect fraud risk or to find the actual incidence of fraud in your organization?

Red Flags

• Employees living beyond their means
• Growing morale issues
• Employees who never take time off or work at odd times (I.e., stat holidays and weekends)
• Excessive overtime, sales returns, damaged products, refunds, coupon redemption, etc.
• Third parties with cash flow issues
• Excessive manual transactions or transactions off the books
• No code of conduct, expense reporting policy, or controls (i.e., training)
• Doing business in highly corrupt countries

Internal Audit Project Opportunities

Fraud Risk Assessment Audit

This audit assesses the organization’s vulnerability to fraud by identifying areas where fraud is more likely to occur and evaluating the effectiveness of existing fraud prevention measures.

Anti-Corruption Compliance Audit

This audit evaluates the organization’s compliance with anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act.

Whistleblower Program Audit

This audit reviews the organization’s whistleblower program to ensure that employees can report fraud and corruption anonymously and without fear of retaliation.

Expense Reimbursement Audit

This audit examines employee expense reimbursements to detect any instances of fraudulent or inappropriate claims.

Vendor and Supplier Audit

This audit assesses the relationships with vendors and suppliers to identify potential conflicts of interest and instances of corruption.

Employee Background Checks Audit

This audit reviews the organization’s procedures for conducting background checks on employees to ensure that potential risks of fraud and corruption are adequately assessed before hiring.

Procurement Fraud Audit

This audit examines the procurement process to identify fraudulent activities, such as bid rigging or kickbacks.

Conflicts of Interest Audit

This audit assesses the organization’s policies and procedures for managing conflicts of interest among employees and key stakeholders.

Gifts, Entertainment, and Hospitality Audit

This audit reviews the organization’s policies and practices regarding gifts, entertainment, and hospitality to prevent potential corrupt practices.

Asset Misappropriation Audit

This audit examines the organization’s assets and inventory to detect any instances of theft or misappropriation.

Internal Controls Audit

This audit assesses the effectiveness of internal controls in place to prevent and detect fraudulent activities.

Compliance with Code of Conduct and Ethics Policies Audit

This audit ensures that the organization’s code of conduct and ethics policies are communicated effectively, understood by employees, and followed throughout the organization.

Financial Statement Fraud Audit

This audit examines financial transactions and records to identify any indications of fraudulent financial reporting.

Data Analytics for Fraud Detection Audit

This audit uses data analytics techniques to identify patterns and anomalies indicative of potential fraud and corruption.

Investigative Audit

In response to specific fraud allegations or suspicions, this audit involves detailed investigations to gather evidence and determine the extent of fraudulent activities.

Workplace Investigations

In response to specific allegations of harassment, misconduct, etc., this audit assesses the allegations for validity and the extent of misconduct, providing recommendations for enhancing the workplace.