The cost of fraud: Accounting & Business

Posted on December 29, 2009 · Posted in Accounting & Business

 

Fraud against the public sector costs hundeds of millions of pounds a year. It is also tying-up about 50,000 publicly-funded homes that could be allocated to families in need, according to the latest Protecting the Public Purse report from the Audit Commission.

 

As the recession bites even harder on public finances, so the emphasis on tackling fraud must be stepped up, insists the report. Derek Elliott, head of the Audit Commission’s Governance and Counter Fraud Practice, explains: “We are saying there’s never been a more important time to focus on this. Every pound lost to fraud is a pound lost to services, or a pound extra that taxpayers have to pay.”

 

There should be three main priorities for councils, in particular, says the Commission – but not all authorities accept the need to take tough action. The main focus points should be single person discounts on council tax, which alone costs about £90m a year; recruitment fraud, which opens up the possibilities of related identity and commercial fraud; and housing tenancy fraud.

 

Of these, the fraudulent use of social housing is arguably the most serious. “If just 1% of homes outside of London and 2.5% of homes in London were subject to fraud it would mean that 50,000 properties around the country are not being used for the purposes intended,” says Elliott. If the Commission’s estimate is correct, some £2bn worth of assets are being misappropriated.

 

With housing waiting lists increasing by over 50% in the last six years – and expected to top two million by 2011 – this is a serious waste of resources. It is also a huge earner for those who fraudulently misuse the homes and sub-let them illegally.

 

One London borough detected a housing benefit fraud by a tenant: because of data sharing through the Audit Commission’s National Fraud Initiative, that person was found to also be a tenant of another borough, receiving housing and council tax benefit. Yet the tenant owned a property elsewhere valued at £3.5m. Both social homes have since been repossessed and the person prosecuted.

 

The Commission points to the success of one London borough that recovered 43 illegally occupied homes in a single year, using just two investigating officers. By recruiting an extra three staff the following year, 2008/9, it recovered 89 homes.

 

Yet one of the concerns of the Commission is that councils may fear that the discovery of fraud may produce negative reports in the local press and consequently not do enough against fraud. Elliott stresses that fraud discovery needs to be seen as a positive. “I would applaud councils which find lots of fraud, because they are doing a good job,” says Elliott. “I am worried about those councils that are not finding any fraud.”

 

As frauds change, so anti-fraud detection and prevention must evolve, says the Commission. Traditionally the emphasis has been on finding housing and council tax benefits fraud. This remains an important area of activity, especially as the incidence of benefits fraud has started to increase again, having fallen. But it should not be at the expense of other fraud detection.

 

The Commission worries that councils are not always taking a tough approach with fraudsters. Specifically, many authorities that detect fraudulent claims for single person discount on council tax do not require claimants to repay past discounts. One council that did require repayment recovered £2,460 from just one person.

 

Authorities are also often lax about fraudulent references. “When people send a reference that is false, you should say this is an offence,” says Elliott. “When you find fraud you should treat it as fraud. That’s where councils need to be universally tougher.”

 

Reference fraud is treated very seriously by the Commission, not least because it opens up the possibility of other frauds. But partnership working can help counteract this. In Croydon, a conversation between key officers in various parts of the local public sector led to an agreement to work more closely together against fraud.

 

This led to the discovery of what Elliott terms “a fraud factory”, involving the manufacture and use of a range of false identities, leading to fraudulent but successful job applications with health and other bodies and the theft of prescribed medicines. “It’s a great story showing that public bodies need to work together,” says Elliott.

 

In another instance, recruitment fraud through the use of a false identity enabled a convicted fraudster to obtain employment with a council, where he was able to divert over £2m in contract payments to a fake company. That money was recovered because of the action by the council.

 

Other frauds, such as blue badge fraud, may be overlooked as perhaps less socially unacceptable. Yet the use of blue badges by people who are not disabled causes serious problems. “Some councils have realised it creates social harm as well as being financial fraud,” says Eliott. The most obvious is that spaces allocated for disabled people’s vehicles are blocked.

 

But it can also feed a black market in blue badges, where they can trade for £500. It is a factor in street crime, with badges stolen from cars. It deprives councils of income, through the evasion of car parking charges and, in London, the congestion charge.

 

Tough action against the fraud can have dramatic effects. By data matching through the Audit Commission’s National Fraud Initiative, one council was able to cancel 300 badges, mostly where the legitimate holders had died. A subsequent investigation also revealed the widespread use of blue badges near the market on market days. Joint action by the Metropolitan Police, the parking contractor and the council led to the recovery of some 40 blue badges being used illegally.

 

It is also essential to have stringent internal controls. One treasury management accountant at a council borrowed and invested on behalf of the local authority without obtaining approval for doing so. While he did not personally benefit, he exposed the council to substantial extra risk exposure: his activities were only discovered because the authority’s debts rose from £23m to £67m.

 

But there is no single anti-fraud model that works across all authorities. Different councils have different vulnerabilities and may suffer frauds specific to their area. This is where local expertise is important and where councillors can play a structured role in tackling fraud.

 

That is why we say it’s essential that every council should have an audit committee,” says Elliott, who is disappointed that some councils still do not. “Every audit committee should ask ‘are we tackling high risk areas’.” The Audit Commission’s message is clear: many councils are still not doing so – and the rewards from doing are substantial.