Fraud in the Retail Industry Due to COVID-19

The retail industry is at the center of the Coronavirus crisis.  While some retailers and their employees are being acknowledged for their essential role in serving their communities, their counterparts from stores within the same shopping center may not have a store to return to when this crisis subsides.  Unfortunately, history has shown that in crisis situations individuals may choose to act unethically to carryout fraud, and it is likely that during this crisis the same will be true.  While operating stores and shuttered operations each have unique issues related to fraud, in this article, we will focus on some of the factors related to fraud that are seen in stores that have remained open.   

Fraud examiners rely on the model of the Fraud Triangle to investigate frauds that have occurred and also to assess the risk of fraud in a given situation.  Through years of experience retail organizations have built internal controls in response to their unique risk factors.  In the current crisis, the risk assessment that took place under normal operating circumstances may no longer be adequately assessing the risks the company faces.

Donald Cressey first hypothesized the Fraud Triangle in the 1970s. It has since become a trusted model for understanding the factors associated with occupational fraud.  The Fraud Triangle focuses on three factors:

  • Financial pressure – real or perceived financial pressure experience by the perpetrator
  • Opportunity – access to systems or a breakdown in controls that allow the fraud to occur
  • Rationalization – the fraudster is somehow able to justify their behavior in their own mind

There is no shortage of financial pressure in today’s business environment.  How that pressure manifests itself on a personal or professional level is unique to the situation.  Companies may commit financial statement fraud to shift profits out of an already decimated first quarter to set-up a possible rebound in the second quarter.  Or, an unscrupulous executive may see the mounting losses related to COVID-19 as an opportunity to improperly characterize expenses in an attempt to salvage margin. 

The unique working arrangements many people find themselves in today were not likely to have been included in a fraud risk assessment performed prior to this pandemic.  Those arrangements may lead to an opportunity for occupational fraud due to a changes in the process for merchandise procurement, review, approvals, inventory counts, return authorizations, or more. 

The volume of on-line orders for some retailers has increased dramatically due to the virus, and some small retailers have implemented or enhanced their online services, but controls to mitigate fraud may not have kept up with the increased activity.  For example, card-not-present fraud losses have steadily increased over the years and given the increased volume of transactions it may present the opportunity for more fraudulent orders to make it through established controls.  Another scheme that may take longer to detect given the volume of online orders is so called “friendly fraud” where a customer orders and actually receives a shipment, but then claims the charge was not authorized or that they did not receive the product and requests a chargeback.        

Rationalization is a deeply personal reaction to the circumstances the individual finds themselves in, but with widespread job losses managers and executives may fear for the security of their jobs if they don’t meet financial or operational goals.  Or, an individual who feels they are “owed” something from the company, for example if they were due to receive a bonus until the financial turmoil hit, may rationalize their fraud to get what they feel they are owed.

Uncertainty in times like these requires communities and businesses to continue working together to meet the challenges ahead. Schneider Downs is committed to helping our clients navigate the uncertainties their businesses face due to the coronavirus and other issues.  If you have any questions or need assistance, please reach out to us, we are happy to help.

Please visit our Coronavirus resource page at for related content.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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