While the PwC Malta 2023 Economic Outlook states that Malta’s economy has continued to outperform many of its euro area peers in terms of growth, largely driven by steady levels of domestic demand and net exports, core inflation rates have recently picked up and appear relatively high when compared to the island’s European counterparts. The previous year has seen a drastic increase in the local rate of inflation, rising from 1.5% in 2021 to 6.15% in 2022. For reference, this exceeds the rate of inflation at the time of the 2008 financial crisis, which stood at 4.26%.
The driving forces behind soaring price levels across the globe have been well documented. Severe disruptions, such as the COVID-19 pandemic and the ongoing Russo-Ukrainian war, have resulted in sizable supply chain stresses as well as pressing requirements for policy support. The end result is that recent inflationary pressures are unlikely to only be felt on a temporary basis.
Though perhaps one of the lesser talked about consequences of inflation, rising prices can have substantial implications on fraud risks. Inflationary periods are likely to exacerbate all three components of the fraud triangle, those being incentive, opportunity and rationalisation. With surging costs of living and financial hardships, individuals will potentially have added incentives to carry out fraud and will likely consider the economic hardships faced to be a rationalisation of their actions.
Therefore, ensuring that adequate internal controls and response plans are in place is a critical step in tackling fraud. Failure to do so will likely in turn lead to potential perpetrators having the opportunity to carry out the fraud. As per their 2022 Occupational Fraud report, the Association of Certified Fraud Examiners (ACFE) ascertained that roughly 29% of fraud cases were linked to an absence of adequate internal controls, while nearly half of the cases would likely have been prevented if stronger anti-fraud systems were in place.
Fraud investigations tend to be more effective when carried out by teams with both the appropriate expertise and experience of the risks at hand as well as the business practices employed by the companies in question. With this in mind, it is perhaps no surprise that Internal Audit (IA) teams, who generally possess intimate knowledge of the control systems in place within their client organisations, are often well placed to aid in the prevention or mitigation of fraud risks.
Though it may be unrealistic to assume that an IA team’s skillset would include intimate knowledge of how to conduct fraud investigations, the IA function can still provide support to anti-fraud management efforts through the provision of vital assurance services over internal controls. Assessing controls designed to detect and prevent fraud, identifying gaps and in turn recommending further control improvements should stand organisations in a much stronger stead to face the uncertain economic landscape we currently find ourselves in.
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