In today’s economy, most businesses are reducing their workforce to stay profitable. When job cuts result in increased responsibility for the remaining employees, the likelihood that fraud may occur also increases.
According to The Association of Certified Fraud Examiner’s (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse, it is estimated that the typical organization will lose five percent of its annual revenue to fraud. The median loss caused by these frauds averaged $150,000. The most common fraud category is asset misappropriation, which accounted for more than 83 percent of the cases in the ACFE Report.
Why Fraud Can Occur
To prevent employee theft, organizations first need to understand why and how employees steal from organizations, which is best illustrated by the fraud triangle of pressure, rationalization and opportunity.
Employees are feeling pressured more than ever with the poor economy, and likely financial difficulties (pressure). Increasing the workload on these same employees without increased compensation or recognition may lead them to rationalize why it would be okay to ‘borrow’ some money or property from the organization (rationalization). Once an employee feels too much pressure and has come up with a rationalization for stealing, all they need is the right chance (opportunity). This is where layoffs can have the greatest impact on increasing the chances of fraud, because internal controls may suffer and the temptation of desperate employees gets the best of them.
Before You Reduce Your Workforce
Organizations should ask themselves these questions before they reduce their workforce:
- What internal controls do we have in place to safeguard assets and ensure the employees act in the organization’s best interest?
- Will the remaining employees be able to take over responsibilities of those laid off without compromising internal controls?
- Will there be a real cost savings from laying off employees with key control functions, if asset misappropriations occur as a result, especially since the median fraud loss is about $150,000 per occurrence?