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When times get tough, employees may be tempted to steal from their employers, as was evidenced by the uptick in employee theft and dishonesty that occurred during the most recent economic downturn.
Given that it often takes 18 months to uncover incidents of employee theft, most of the occupational fraud that occurred during the Great Recession are just now coming to light, according to a report published by the Austin, Texas-based Association of Certified Fraud Examiners.
“Occupational Fraud: A Study of the Impact of an Economic Recession,” documented the increase in employee theft occurring from early 2008 through early 2009 — the height of the economic downturn.
The study also found that employee layoffs that were pervasive during the time period left “holes in organizations' internal control systems,” making them more susceptible to occupational fraud.
More than half — 55.4% — of the 507 randomly selected certified fraud examiners who responded to the ACFE survey reported that the level of occupational fraud was slightly or significantly increased during the recession compared with the amount of such crimes they investigated or observed in prior years. In addition, about half of the investigators surveyed — 49.1% — cited increased financial pressure as the biggest factor contributing to the increase in occupational fraud.
“The theory is, in a down economy, you see more occupational fraud. Financial distress is the impetus,” said John Warren, vice president and general counsel at ACFE. Moreover, “frauds are detected when company financials suffer because they can be hidden” during good financial times, he said.
“The markets for crime insurance would all tell you there has been an uptick in crime losses,” said Lisa McAleenan, a senior vice president at broker Lockton Cos. L.L.C. based in St. Louis. “We've seen that with our client base.”
Economic downturns often provide an additional incentive for employees to steal because, as the saying goes, “desperate times call for desperate measures,” said Eric Cernak, vice president at Hartford Steam Boiler Inspection & Insurance Co. in Hartford, Conn.
“When times are tough and they're looking for an extra source of income, people will do things that they might not otherwise do. If they think it's a faceless crime or only defrauding an institution where they have a chip on their shoulder for, during tough economic times the potential for fraud is greater,” Mr. Cernak said.
Though employers must be careful of profiling, which could result in employment practices litigation or a character defamation suit filed by an employee wrongfully accused of stealing, “if someone appears disgruntled and has expressed their frustration, that's someone you might want to keep an eye on,” Mr. Cernak said. “Say the annual raise or bonus wasn't as much as they thought, or they were passed over for a promotion,” he said.
Keith Lavigne, a senior vice president at New York-based insurer Ace USA Professional Risk, said his company has “absolutely” seen an increase in claims filed as a result of thefts that occurred during the recent recession.
“It's the behavior of human beings that we're talking about. In difficult economic times, it leads companies to reductions in force, employee layoffs or even downsizing employee perks. It's just temptations. Employees look to other areas or for opportunities to replace that loss,” he said.
Moreover, “when you have a layoff in a company, other employees take over the responsibilities” of those who have been laid off, “and that's when the fraud that may have been concealed for a long period of time is often discovered,” Mr. Lavigne said.
“A significant amount of employee-related theft is driven by the economy and the impact of the economy on employees' families,” said Chris Giovino, a partner at New York-based forensic accounting firm Dempsey Partners L.L.C.
In fact, because most occupational fraud isn't uncovered for 18 months to two years, “we have seen a lot of it surfacing within the last year, and our forensic practices have picked up considerably in the last 12 months,” Mr. Giovino said.