The Association of Certified Fraud Examiners estimates that organizations lose approximately 5% of revenue to fraudulent activities each year. This percentage should increase as all organizations manage through COVID-19. An estimated 20.5 million jobs were lost in the U.S. economy for the month of April alone. Companies revenues have decreased significantly with many companies beginning to file for bankruptcy or being on the brink of bankruptcy. The financial and motivational pressures resulting from COVID-19 for companies and households alike may blur the line separating acceptable and unacceptable behavior. 

According to the 2020 Report-to-the-Nations, the ACFE’s 11th study on the costs and effects of occupational fraud, asset misappropriation occurs in most fraud schemes (86% of cases). Asset misappropriation is the theft or misuse of a company’s assets, usually cash and inventory. Employees who have personal financial pressures arising from income worries may rationalize unethical behavior and misappropriate company assets. 

If you are concerned an employee may be committing financial statement fraud within your organization, here are a few red flags to look out for: 

  • Decreasing gross profit margin 
  • Increasing accounts receivable or inventory in relation to sales 
  • Unauthorized vendors in accounts payable; or multiple payments to the same vendor with different account numbers 
  • Increasing earnings but declining cash flow 
  • Unusually high revenue and low expenses that are not attributed to a business’s seasonality or differ in comparison to industry peers 

When trying to identify an employee that may potentially be committing  fraud, a few red flags to be aware of include: 

  • Employee lifestyle changes (e.g., expensive cars, jewelry, homes, etc.), 
  • Significant personal debt and credit problems, 
  • Drug, alcohol, or gambling addictions, 
  • Fear of losing job or resentment and anger towards management, 
  • Lack of segregation of duties (custody of assets, authorizations, record keeping, and reconciliation/review of accounting documents ideally should be assigned to different individuals in the company’s organization) 
  • Refusal to take vacation or sick leave (concerned that a colleague taking over their duties may uncover the fraud)

Companies can mitigate their risk of loss due to fraud by purchasing employee dishonesty insurance coverage, sometimes referred to as a fidelity bond, crime coverage, or crime fidelity insurance. This insurance is a type of business insurance that protects businesses from a financial loss as a result of covered fraudulent acts conducted by an employee or group of employees. Each of these policies will have their own specific coverages, exclusions and conditions so it is important to work closely with your insurance agent or broker when seeking such a solution.  

Our team has expertise in the forensic accounting, legal, and insurance fields, and experience working with insurance carriers, attorneys, and law enforcement to investigate asset misappropriation matters to assist the injured party in recovering funds and prosecuting those responsible

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Please be advised that any and all information, comments, analysis, and/or recommendations set forth above relative to the possible impact of COVID-19 on potential insurance coverage or other policy implications are intended solely for informational purposes and should not be relied upon as legal advice. As an insurance broker, we have no authority to make coverage decisions as that ability rests solely with the issuing carrier. Therefore, all claims should be submitted to the carrier for evaluation. The positions expressed herein are opinions only and are not to be construed as any form of guarantee or warrantee. Finally, given the extremely dynamic and rapidly evolving COVID-19 situation, comments above do not take into account any applicable pending or future legislation introduced with the intent to override, alter or amend current policy language.