Drop in reported cases belies extent of UK fraud problem

Survey indicates behavioural change in fraud reporting

Reported Fraud in the UK has reached a plateau, according to BDO LLP’s six-monthly update, suggesting that the UK authorities have reached the limit of their ability to prosecute offenders, and indicating changing behaviours when organisations come to tackle fraud. The figures have prompted Simon P. Bevan, Head of Fraud Services at BDO LLP, to suggest that the finance and insurance sectors may be ‘leading the way’ by choosing to deal with the issue via civil, rather than criminal, means.

According to the half-year FraudTrack figures, released today by BDO LLP, reported fraud totalled approximately £920m (1 December 2010 to 31 May 2011), compared with £1.06bn this time last year. The average value of a single reported fraud has also dropped to approximately £4.5m, compared with just under £6m this time last year. This is the most significant drop in 4 years yet, with 205 reported cases, also represents the highest number of reported incidents. 

For BDO’s experts, the figures indicate a disparity between how fraud is being tackled in the private and the public sectors. Whilst fraud reported by those in public administration has almost doubled since last year (from approximately £216m in 2010 to £431m in 2011), fraud reported in the finance and insurance sectors has almost halved in the same period (from around £524m in 2010, to £274m in 2011). Public administration cases now represent 46% of all reported fraud in the UK.

In terms of types of fraud reported, procurement fraud – often anecdotally referred to as the most common type of fraud – was only reported twice within the period, compared with theft and cash fraud, which was reported 59 times.

Simon P. Bevan, Head of Fraud Services at BDO LLP, comments

On the decline in reported fraud:

“What’s particularly interesting about these figures is that they don’t necessarily correlate with what we’re seeing in the market. Having worked through two recessions, my experience is that fraud is more likely to be uncovered in these market conditions. Do these figures indicate that less fraud is happening? Not in my view. Rather, we think this represents a reluctance to report fraud to the authorities, particularly in the financial services sector. As the old adage goes, ‘90% of fraud goes unreported’ – so this isn’t particularly surprising. The fact is that many people who fear that reporting fraud will lead to bad publicity also question whether reporting fraud to the police or SFO is the most effective method of dealing with it. We believe this is a key reason why reported fraud figures are down.” 

On differing approaches between public and private sectors:

“What’s likely is that more and more organisations in the financial services sector are finding a different method for tackling fraud. They will most likely be taking the view that the civil approach means they are more likely to recoup lost money and less likely to risk reputational damage.

It’s important to note the context in which we’ve conducted this research. The figures come at a time of stretched police resources and increasing uncertainty about the scope and role of regulators such as the SFO and FSA. Our regulators are doing their best to work with what they have, but this uncertainty is not lost on UK plc.”

On the types of fraud reported:

“It’s well known that the majority of fraud committed in the UK is procurement fraud, yet this is not what we’re seeing in terms of reported figures. What these figures indicate is that entities are self selecting which fraud they report. If it’s a simple cash fraud, it seems that organisations are more likely to go the police, yet with a complex procurement fraud they are choosing to deal with the issue internally.”

BDO’s Top tips for tackling fraud:

• Don’t neglect over-performance: If something is too good to be true, it usually is.
• Review changes to the supplier master file: It is very important that an exception report of any changes to standing data (e.g. the supplier master file) is produced and robustly reviewed.
• Monitor the car park: Although it is stupid to flaunt your ill gotten gains at work, most fraudsters do.
• Perform background checks on new recruits: Don’t give those with a flawed employment history the chance to commit fraud in your company.
• Pay attention to morale: Fraudsters are often dissatisfied with their work and rationalise their entitlement to further reward.
• Investigate high staff turnover: Exit interviews for departing staff can be used to detect potential problems.
• Consider remote locations: They often get significantly less management time.
• Conduct zero based budgeting: Fraudsters typically start at a small scale to test detection, before steadily increasing their greed. Rather than relying wholly on trend against prior year, embark on a ‘zero based budgeting’ exercise to catch them out.
• Pay attention to areas where there is no physical product: Such areas are often more susceptible to procurement fraud.
• Assess IT vulnerability: Consider administrative controls and passwords, prevention of unauthorised software installation and blocking the copying of data to USB devices.
• Be wary of false accounting: Bonuses and job security can create significant pressure.
• Review your bonus structure: Is it fair, transparent and aligned to long term success?

- Ends –

Note to editors

Simon P Bevan is Head of the Fraud Services at BDO LLP.  He has over twenty years experience of investigating fraud both in the UK and other international locations. 

FraudTrack is prepared by BDO and this report is based on all reported fraud cases of over £50,000 from 1 December 2010 to 31 May 2011.  The sources for the database are publicly available and include the UK’s national, regional and local press. 

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