Practical Law

According to the PriceWaterhouseCoopers’ (PwC) report, Cutting costs and cutting fraud: economic crime in the public sector is that the current economic climate of spending cuts and pay freezes has lead to an increased rise in the level of employee and sub-contractor fraud.  Based on a survey of senior representatives from the public sector, the report shows that, since PwC’s last survey in 2009, the number of organisations experiencing some type of fraud in the last 12 months has gone up by 60% and according to the 2011 National Fraud Authority Indicator equates to £21 billion a year. That is a substantial sum being defrauded from the public purse.

What is apparent from the survey is that those responding expect the risk of fraud to further increase as fraudsters find more opportunities to commit fraud as they identify and exploit weaknesses in  an authority’s control system.  Despite this expectation, nearly half of the organisations responding said there would be no change in their fraud prevention and detection methods. 

The following key issues are highlighted by PwC’s survey.

• The most common type of fraud has changed from asset misappropriation, which is the easiest fraud to detect, to accounting fraud (reported by two thirds of the respondents to the survey). Accounting fraud, which includes accounting manipulations, fraudulent applications for credit and unauthorised transactions, can be spotted if an authority’s internal audit team apply Continuous Transaction Monitoring (CTM) technology. When embedded into an organisation, CTM can identify a broad range of anomalies previously undetected such as duplicate invoice payments, false suppliers and unauthorised transactions. The use of CTM can save an authority a substantial amount of money justifying the cost of implementing the technology.
• In 2011 the majority of economic crimes were committed by employees whereas in 2009 such crimes were committed by external fraudsters. Therefore, organisations need to ensure that they have a proper screening process in place to identify undesirable or dishonest candidates before they join the organisation. As part of the screening process, organisations should check the academic and professional history of candidates so that undisclosed criminal records can be identified. For information on how to avoid the legal risks in the recruitment process, see PLC’s practice note on recruitment.
• Given the effects of the Spending Review 2010, existing staff under increasing personal financial pressure and threatened with redundancy may feel that they have got nothing to lose by committing a fraud. Therefore, organisations should ensure their fraud risk management is a fluid process, changing as necessary to adapt to the needs of the business. They should continually re-evalute their risk assessments and control processes so that they focus on the right areas for potential fraud.
• Informal tip offs continue to be the main means of detecting frauds. However, this method relies upon a series of coincidences, which is that somebody finds out about the fraud, is compelled to do something about it and informs the right person.
• A key area of concern for respondents is detecting procurement fraud. The OECD’s guidelines on how to fight bid-rigging or collusive tendering in public procurement contains some helpful tips for public authorities, see OECD publishes guidelines for fighting bid-rigging in public procurement.
• 26% of frauds were reported through an organisation’s formal whistleblowing process since many organisations have made a concerted effort to encourage staff to do so. All organisations should ensure that they have an effective whistleblowing policy in place. For more information on whistleblowing and the key strategies for employers and workers to consider, see our quick guide.
• Organisations should carry out robust fraud risk assessments (FRA), described by the Institute of Internal Auditors as a “critical component” of a risk management programme. What the survey showed was that 41% of respondents had never carried out an FRA. The 21% of respondents that undertake a FRA admitted that their Chief Executive and Audit Committee had never reviewed the assessment. 15% of respondents said that their FRA had never been reviewed by their Audit Committee. Those organisations that had undertaken a review of the FRA only did so annually but, as PwC pointed out, reviewing an FRA on an annual basis meant that an organisation’s risk assessment was out of date. Therefore, organisations should consider implementing a regular FRA and ensuring that the assessments’ findings are reported to chief officers and the audit committee.
• The Bribery Act 2010, which will significantly strengthen anti-corruption legislation in the UK, cannot be ignored by public sector organisations, see our Ask the team. It is essential that public sector bodies are prepared for its implementation since any breach of the Act will have damaging repercussions (unlimited fines both for individuals and corporations and lengthy jail terms for individuals). Organisations must conduct a thorough risk assessment, evaluate the existing procedures and address any control gaps. For more information, see the PLC toolkit on complying with the Act.

Public sector organisations would do well to take on board the findings of PwC’s survey and review their fraud prevention and detection processes.  When doing so, those responsible for governance will find a helpful checklist at appendix one of the Audit Commission’s report, Protecting the public purse 201: fighting fraud against local government and local taxpayers.  The checklist covers:

• Fraud awareness.
• Reassessing fraud risks.
• Fraud risks in housing, procurement, recruitment, personal budgets, council tax and housing benefits.

The following PLC materials may also assist:

• Internal fraud: battening down the hatches which article examines when and how to conduct an investigation into internal fraud or financial irregularities.
• Corporate fraud: combating the threat from within which article looks at the legal framework in the UK for detecting and combating fraud.