The food and beverage (F&B) sector is seeing an increase in the potential for fraud as the speed at which the sector had to react to the COVID-19 lockdown created financial and logistical challenges which in turn presented opportunities for fraud. Businesses should now review decisions they undertook at pace and apply the appropriate steps to protect themselves.
With any change to a business, fraudsters seize their opportunity. And the coronavirus situation has been no exception, presenting increased fraud challenges to the food and beverage sector. Businesses are now beginning to identify where they have been exploited.
Bruce Dorris, President and CEO of the Association of Certified Fraud Examiners, has described the coronavirus pandemic as a “perfect storm for fraud”1.
Why is fraud increasing now?
Here are a handful of reasons:
Risks with new suppliers – changes to supply chains have caused some businesses to look elsewhere for supplies at short notice and without full due diligence being done. This brings with it the risk of sub-standard produce being introduced into the supply chain
Cash flow challenges – reduced cash flow provides a potential incentive to misstate results, for example by inflating debtors to increase borrowing capacity
Grant fraud - government coronavirus relief schemes, including the Retail, Hospitality and Leisure Grant Fund (RHLGF) are subject to misuse
Management fraud – there are incentives for some F&B businesses to misstate results, either to mask deteriorating performance or to meet increased stakeholder expectations
Employee fraud – employees, some of whom are on reduced hours and yet with enhanced responsibilities at home, may be struggling financially, leading to a higher incentive for dishonesty
Risks with new employees – some F&B businesses are thriving and recruiting additional staff at short notice; without full employment due diligence these businesses are at an enhanced risk from rogue employees
Cyber – increased home working (with associated use of more vulnerable domestic IT networks), staff liaising with unfamiliar contacts at new suppliers, and an increase in online shopping all present enhanced risks of cyber-attacks
Controls - with a change in how businesses operate, both internally and externally, existing controls, policies and procedures are now potentially ineffective. Internal audit and other safeguards are either challenged or cannot perform their role
How can businesses detect and prevent fraud?
In light of the raised threat level, businesses should reconsider their counter-fraud measures, to include:
Using data analytics with an alert system to carry out risk-orientated analysis of historic financial transactions
Implementing look back email review and real-time communications monitoring software (eg Relativity Trace)
Updating fraud risk assessments
Ensuring adequate supply chain due diligence is in place
Obtaining counter-fraud training for staff
Reviewing policies and procedures, including for whistleblowers
Where a potential fraud is uncovered, your fraud response plan should allow the business to act quickly – ideally within 24 hours. The response plan should consider practical and strategic issues, the scope of any investigation, legal privilege, and how access to people and data is to be provided.
Should a business suffer fraud, a robust evidential package needs to be provided to the loss adjuster to maximise recovery.
Where losses are not insured, the business should consider whether litigation would be financially worthwhile and investigate whether assets are available from which to recover losses through an action.
Many frauds impact on accounting records in some way: this impact must be assessed.
As well as identifying individuals associated with fraud, a fraud investigation often identifies control weaknesses.
It is important that the business learns lessons from previous fraud incidents, feeding any weaknesses identified back into risk assessments, training courses, control improvements, recruitment policies, and the cultural environment of the business.
To ensure that your business is prepared and to learn more contact James Helme.