Organisations can potentially lose millions of pounds through fraud. Diverting funds from counter fraud is tempting in straitened times, but simple measures, such as vetting potential staff, will save money
Without doubt, someone at this very moment is planning to defraud your organisation of very significant sums of money. A scary thought, but large organisations attract fraudsters like ants to a picnic.
The level of fraud for all sectors rose by 50% to £630m in the first half of 2008 according to KPMG’s Fraud Barometer. The government sector alone lost £69.4m.
But, of course, you know all about the risks. You’ve put in place proper governance and control mechanisms. You’re confident you’ve got the risks covered… or are you? Fraudsters are constantly devising new and more ingenious ways to take our money. As for those controls: are they good enough and does everyone comply?
The question we all have to answer is not whether we are doing something, but whether we are doing enough. And when the day of reckoning comes — that multi-million-pound, headline-grabbing fraud you thought could never happen — how will you be judged?
One of the first steps in protecting public funds is preventing fraudsters from entering the organisation.
My own organisation, Waltham Forest council, has been able to weed out potential fraudsters before they get through the door by applying a detailed screening process to successful job applicants.
The number of selected candidates failing the vetting process was a staggering 22% when the process began — and this didn’t include those who withdrew when they found out they would be checked. Now the failure rate has dropped to around 5%-6%.
This reduction is partly because word has got around about the screening process. If your organisation doesn’t carry out detailed checks, one in five of your new appointees could be a liar — or worse — if our experience is anything to go by. And the people who failed the checks at Waltham Forest could well be on your staff by now.
If every authority adopted the same standards then this type of risk would be eliminated. Waltham Forest has recently been publicising its vetting system, and other public sector organisations have shown interest. However, only one has had the commitment needed at all levels to implement the process. An effective counter-fraud framework requires a level of commitment and demonstrable action from the top tiers of the organisation down, not just paying lip service to a set of policies that gathers dust on a shelf.
At Waltham Forest, fraud risk is considered as part of the overall risk framework and appears in the corporate governance risk map. The corporate audit and anti-fraud team has unrestricted access to premises and documents, and a direct line to the chair of the audit committee as well as to the chief executive. All of this is written into the constitution.
As the economic position worsens and the prospects for public sector funding become more gloomy, the pressure to divert money from apparently bureaucratic controls and into frontline spending is increasing.
But let’s be clear: counter-fraud work can and will save you money in the long term. Think of all the money spent on investigations and disciplinaries, as well as the losses themselves and the cost of recovery. And if your counter-fraud work is proactive and well focused, you can save money by eliminating duplication and waste in your control procedures.
CIPFA has also produced a guide on the subject; Managing the Risk of Fraud – Red Book 2. It follows on from and builds on the framework set out by Red Book 1, but it's not just about anti-fraud work. It provides a range of measures that will improve internal control, support good governance and serve as a measuring stick for directors of finance and audit committees.
A group of experts in the counter-fraud world contributed to the Red Book. It has been endorsed by the newly established National Fraud Strategic Authority and the Audit Commission.
This will provide you with one template for best practice and access to all the documents and procedures that you need. So what are you waiting for?
Ian O’Donnell is executive director of finance at the London Borough of Waltham Forest. For more information on purchasing the Red Book 2, please contact Dean Henry at CIPFA on 020 8667 8578
