How can organizations prepare for and reduce the increased risk of fraud during employee layoffs?
Layoffs are sometimes necessary for an organization to remain competitive, even during times of positive economic outlook. Still, they’re not free of collateral damage when it comes to the risk of fraud.
Three broad factors that impact fraud risk are opportunity, financial pressure, and rationalization—any of which can significantly impact an organization amid employee layoffs.
The Opportunity Factor
Increased opportunity can embolden employees and others – like customers – to engage in fraudulent activities, since individuals may perceive a lower likelihood of being caught. For example:
- Reduced staff may weaken internal controls and compromise duty segregation, making fraud easier to commit and harder to detect.
- Heavier workloads on remaining employees can lead to shortcuts, unintentionally creating fraud risks.
- A service provider’s layoffs may impact its control performance for business partners, increasing fraud risk for partners and their customers.
The Financial Pressure Factor
Unemployment benefits provide short-term income to workers who lose their jobs through no fault of their own, but laid off employees are typically only eligible to receive weekly benefits which are capped to replace at most around 50 percent of their previous earnings. The increased financial pressure can push employees and others to engage in fraudulent activities which may include:
- Employees being laid off face the possibility of prolonged unemployment and may resort to fraud as a financial safety net.
- Even if employees aren’t impacted by layoffs at their organization, layoffs elsewhere can create financial pressure, indirectly raising fraud risk. For example, financial pressure from widespread layoffs may lead to heightened fraud risk at an insurance carrier with more individuals intentionally misrepresenting information on applications to obtain lower-cost coverage fraudulently.
The Rationalization Factor
Perceived justification for actions known to be wrong can also contribute to employees and others choosing to engage in fraudulent activities.
- Employees impacted by layoffs that feel betrayed by their employer and its leadership may justify fraud as retaliation for perceived injustice.
- Remaining employees, burdened with extra work without higher pay may rationalize stealing as compensation.
- Although not directly impacted, third parties may exploit perceived unfair treatment of employees to justify fraud against the organization.
How Can Organizations Mitigate Layoff Related Fraud Risk?
Fraud risk is just one factor in a layoff strategy, and organizations often take steps to mitigate the increased risk.
Providing financial resources can reduce employees’ temptation to commit fraud and make it harder to justify stealing from a supportive employer. Similarly, increasing both actual and perceived detection, restricting access to sensitive information, and reinforcing expectations can help deter employees from attempting fraud.
Here are more specific examples of how an organization can effectively manage fraud risk amid employee layoffs:
- Notice Periods: The federal Worker Adjustment and Retraining Notification Act requires most employers to give 60 days’ notice in cases of mass layoff. Even when not required by law, some organizations still provide a notice period before layoffs, allowing affected employees time to prepare and seek new jobs, reducing the stress of potential unemployment.
- Immediate Terminations: Immediate terminations may be necessary for layoffs of employees with access to sensitive information or systems at risk of compromise. Even if the employer temporarily continues to pay them, immediate termination can help mitigate security risks.
- Increased Monitoring and Controlling Activity: Instead of immediate termination, organizations may opt for closer monitoring and restricted access. They can limit employees’ access to sensitive systems while allowing them to complete other tasks. Enhanced monitoring of emails and physical file activity can also help mitigate risks before layoffs take effect.
- Confidential Information Protection Obligation Reminders: Even if already part of an employment agreement, an employer can reduce the risk of unauthorized disclosure of protected information – like intellectual property, customer lists, and trade secrets – by providing reminders to affected employees.
- Employee Assistance Programs (EAPs): EAPs often provide employees with financial counseling and assist those impacted by layoffs in finding a new job, which can help them effectively manage personal financial stress.
- Severance Pay: Some employers may decide to provide severance pay for laid-off employees, which cannot only reduce financial pressure but also deter an employee’s ability to rationalize when it comes to stealing from the company.
How Can Schneider Downs Help?
If your organization needs assistance with fraud risk management strategy, assessing your risk to help prioritize efforts, evaluating the maturity and/or effectiveness of your risk management practices, developing awareness content or procedures or finding a litigation expert witness related to fraud, contact James Rumph in our Columbus office or Tom Pratt and Brian Webster in Pittsburgh. If you need assistance with cybersecurity consulting, contact Carl Kriebel.
About Schneider Downs Business Advisory
Our experienced team of business advisors consisting of Certified Fraud Examiners, Certified in Valuation Analysts and Certified Mergers and Acquisition Advisors leverages its industry expertise to maximize value and minimize risk proactively or during acquisitions, litigation, arbitration, corporate reorganization and other major business events. To learn more, visit our dedicated Business Advisory page.
