Fraud breaks £2bn barrier in highest figure yet for BDO FraudTrack

Companies must be ‘more proactive’ with fraud prevention, warns accountancy firm 

The value of reported fraud rocketed to more than £2bn (£2,095,341,000) in the UK last year, according to accountancy firm BDO’s 2011 FraudTrack report. This represents a 50% increase on last year’s figure of £1.4bn and the highest ever figure for BDO’s annual survey. Since its launch in 2003, when fraud totalled £331m, there has been a seven fold increase in the cost of reported fraud. 

The 2011 FraudTrack report, which collates data from all reported fraud cases over £50,000, also shows a dramatic rise in both the number, and average value, of reported cases. In 2011 there were 413 reported cases, at an average value of £5m, compared with 372 cases in 2010, at an average value of £3.7m.

Commenting on the figures, SimonBevan, head of fraud at BDO LLP, said:

“The fact that reported fraud is up is worrying, but not at all surprising. When the economic climate is difficult there is even more focus on the bottom line and driving out unnecessary costs, so fraud is more likely to be uncovered. But organisations need to be much more proactive when it comes to preventing fraud. Too often risk teams are either too externally focused or fail to look at fraud from a financial point of view. Organisations need to be taking a P&L (profit and loss) approach to fraud  risk. That is to say you look at your P&L and the areas in which you receive or pay the most monies will be where the greatest fraud risk lies. For example if you are a cable manufacturer your greatest expenditure may be in the purchase of copper and if you run a call centre it may be payroll that is your biggest risk area. If companies continue to take a reactive approach to preventing fraud, I’m in no doubt that these figures will continue to rise year on year. You cannot design all fraud risk out of a business but you can put trip wires in place.

Sector breakdown:

Whilst on face value sectors such as finance & insurance appear to be tackling the issue effectively, the outlook is less positive for sectors such as construction, which is failing to take the issue seriously, and retail, which has experienced a boom in reported fraud:

• After dominating fraud figures in recent years, the finance & insurance sector only accounted for 27% of all reported fraud in 2011, compared to 56% in 2010, representing its lowest percentage in the last 5 years.
• There has been a boom in reported fraud in the retail sector, which accounted for 12% of all fraud in 2011, compared with 2% in 2010
• The construction sector represents just 1% of all reported fraud, compared with 34% last year.

Comments from Simon P Bevan:

“No sector is safe from fraudulent activity, which is having a serious impact on the bottom line for all industries.”

On finance and insurance:

“Financial services institutions have invested heavily in systems and technologies to prevent and track fraud, so the fact that reported fraud in this sector has decreased as a percentage of overall fraud suggests this approach is working. But there is still a long way to go. The most serious frauds, in terms of financial loss, in financial services are often committed by employees and management. Yet most of the inhouse fraud teams within banks etc tend to be made up of ex-policemen. They are often too focused on external ’Criminals’ dealing with credit card fraud, phishing etc., when the greatest risk is internal with banks employees committing  commercial lending, mortgage or rogue trading fraud. It is this failure to take a holistic approach to tackling fraud that can lead to those high profile, costly incidents that we have seen in recent years.” 

On retail:

“Retail is a vulnerable industry, especially in the current economic climate, and given that 30% of all fraud is committed by suppliers and customers, it is not surprising that this sector has been so dramatically affected. Tackling fraud can have a real impact on profit margins and this should be a priority for retailers in these tough times”.

On construction:

“That the figures are so low for this sector does not suggest to me that there is no fraudulent activity happening, rather that fraudulent activity is not being reported. Fraud and corruption have been a commercial reality in the construction industry for a long time, so the fact that so little is being reported indicates that organisations have failed to grasp that they need to bring their business practices up to date, especially in the wake of the Bribery Act.”

Types of fraud:

• Tax fraud accounts for the highest percentage of fraud committed, at just over 36% and with an average cost of £13m – significantly higher than the average across all frauds (£5m). As a percentage of overall fraud, tax fraud has steadily increased in recent years, from 15% in 2009, to 20% in 2010, to 36% this year.  
• After tax fraud, most fraud is committed by suppliers and customers (30%) with the average cost per supplier/customer fraud at £7.7m. As a percentage of overall fraud this has also increased steadily, from 12% in 2009 and 18% in 2010.
• Employee fraud is down to 10% from 14% last year. The average per fraud is only £1.4m which is substantially lower than the average across  supplier/customer fraud and across all frauds
• Cases of corruption are steadily increasing from less than 1% in 2009, to just under 2% in 2010 to 4% in 2011
• Management fraud has been steadily decreasing and this year’s figure is the lowest in 4 years (2011 – 5.5%, 2010 – 13%, 2009 – 24%, 2008 – 31%)

Comments from Simon P Bevan:

“Tax fraud is consistently high and this tends to be in the form of VAT fraud, such as carousel fraud. This obviously impacts the public sector and we know that this is a key focus for the Coalition Government, which has voiced its intentions to cut the tax deficit, so it will be interesting to see how this figure changes in the coming years.”

“In terms of the private sector, there are still two main ways to defraud UK businesses. You either dilute the revenue coming in or overstate the costs going out. This has an impact on the types of fraud that we see in different industries. For example, in the service industry it is easier to run a business within a business where revenue is diverted elsewhere. This is harder to achieve in, say, the manufacturing sector where such revenue dilution would result in stock losses. The manufacturing sector is, therefore, more likely to suffer a procurement fraud”.

“Both employee and management fraud have fallen dramatically. Management fraud has gone from 31% in 2008 to only 5.5% this year. We believe this is a reflection of the fact that whistleblowers tend to keep their heads down at times of high unemployment.”

 

Note to Editors

Fraud Track is prepared by BDO LLP and is based on all reported fraud cases over £50,000 between 01/12/2010 and 30/11/2011. The sources for the database are publicly available and include the UK’s national, regional and local press.   Simon Bevan is BDO LLP’S head of fraud services team. He has over 20 years experience of investigating fraud in the UK and over 20 other international locations. He previously set up two European market leading fraud units and has investigated frauds in both the private and public sector. Simon has worked on some of the world’s largest frauds as well as working for UK and overseas government agencies.   BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU.  BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. The combined fee income of all the BDO Member Firms, including the members of their exclusive alliances, was €4.06 billion in 2011. The global network provides business advisory services in 135 countries, with almost 48,800 people working out of 1,118 offices, worldwide.   BDO is the brand name for the BDO International network and for each of the BDO Member Firms.   BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms.