There has been a sharp drop in crime during stay-at-home directives and social isolation. New York Mayor Bill de Blasio said his city hasn’t seen such low levels of crime “since the 1950s.”
In an interview for an up-coming LP Magazine print feature, however, security consultant Sean Ahrens said he doesn’t think LP executives should expect that to last. Economies will open, but with personal economic fortunes hit hard, he thinks more crime is on the way. “External theft will increase as persons who recently are unemployed will be pushed towards malevolent acts,” he believes.
Findings from past economic downturns are distressingly consistent—retailers report more shoplifting; facilities report more burglaries and an increase in general crime; and businesses indicate a rise in robberies. Such theft trends are hardly surprising when millions of jobs are lost.
But What about Employee Fraud?
Are the still-employed or re-employed thankful to just be working or might financial pressures drive more of them to steal from employers? Ahrens thinks LP leaders should expect the latter. “Internal theft will increase significantly due to rationalization—the employee believes they are owed for their contributions,” he said. The challenge may be complicated by cuts in LP staff. Retailers may unknowingly be relying on fraud controls that are no longer in place—right when employee theft is on the rise.
Employee theft tends to get worse in tough economic times. After the financial crisis in 2009, most businesses reported that employee theft increased—in both number of incidents and amount per incident—compared to the year prior to the recession, according to a survey by the Association of Certified Fraud Examiners (ACFE). In one typical case, four employees of a home improvement retailer were caught conspiring to defraud the company in a vendor kickback scheme. In a weakened economy, the threat of fraud rises, ACFE analysts concluded, and “employees pose the greatest fraud threat.”
It makes sense to Paul Zikmund, director global forensics, compliance and integrity services at Baker Tilly LLP. More employee theft in an economy turning downward fits the traditional “fraud triangle,” which suggests the potential for employee fraud increases where there is opportunity, motivation created by frustration and financial pressure, and people rationalizing their behavior. These three elements can become increasingly prevalent as fortunes fall and drives the risk for fraud.
The message is simple, according to guidance from the ACFE: Desperate people do desperate things, even loyal employees who in a good economy would never think of committing fraud against their employers. Retail organizations, therefore, must be vigilant during turbulent times by ensuring proper fraud prevention procedures are in place.
3 Actions Retailers Should Take
Predictions about the economy are all over the place, but even under the rosiest of projections, employee fraud could be expected to increase throughout the rest of the year, with small businesses likely to be hit hardest. Small firms that lack good separation of duties are certain to be taken advantage of by trusted employees who succumb to financial pressures, say experts. However, big companies also need to be careful. If they allow greater opportunity for fraud to coincide with workers’ greater motivation to steal, they could be in for growing losses from employee theft. Three actions retailers might take:
1. Send a message to employees that fraud will not slip under the radar. Between layoffs and desperation to stem losses, it’s easy for employees to sense that the company’s attention is entirely elsewhere and that a little embezzlement will slip under the radar. Companies may choose to cut some prevention controls to save money, but it should do everything possible to leave visible controls as strong as ever.
Fraud training for employees and managers, visible management support of anti-fraud efforts, and responding with transparency to calls made to fraud hotlines should not change. Companies should also continue to follow established protocol in response to alleged fraudulent activity by employees and send a clear message in allotting punishment that it will not tolerate it.
2. Examine whether layoffs have unintentionally removed important layers of security for preventing and spotting employee wrongdoing. In the 2009 recession, 60 percent of companies reported cutting staff and 35 percent of those said it resulted in the loss of fraud controls. ACFE’s warning then is relevant today: “Employees who remain after a round of layoffs often experience decreased morale, which—when combined with the added job responsibilities of former colleagues, fewer formal controls, and an increased pressure to perform—can lead to the perfect storm for fraud.” Carefully crafted segregation of duties can be eliminated during job cuts, and LP teams need to examine if—in the wake of layoffs—adequate separation of duties remains for key positions.
3. Increase auditing frequency, data mining, and data analysis to alert to trends and potential fraud activity. Also, to eliminate cash theft, evaluate current physical controls and conduct unannounced spot checks, say experts.
Shoplifting and ORC Expected to Increase
Experts also expect the organized retail crime (ORC) and shoplifting will also rise as stores begin reopening. LPM recently produced a webinar—Preparing for an ORC Epidemic Post COVID-19—with industry professionals discussing data from past economic upheaval and suggestions for retailers.