Some of Britain’s top companies wide open to fraud
Tue, Sep 8, 2009
FTSE companies with a combined annual turnover of £180 billion were found to be unprotected against fraud in the first-ever analysis of the resilience of UK plc to fraud.
The research is published in the wake of increased fraud as a result of the recession. At the height of the economic boom, the Home Office estimated that fraud was costing the UK at least £14 billion a year. It is believed that this figure has since spiralled, with the City of London Police – the leading police force for counter fraud operations – reporting an increase of 72 per cent in the number of recorded fraud cases over the last 12 months. Some researchers say the actual amount lost to fraudsters is nearer £72 billion a year in the UK.
Dr Mark Button, director of the Centre for Counter Fraud Studies based in the Institute of Criminal Justice Studies, lead the study ‘The Resilience to Fraud of UK plc’ with accountancy firm MacIntyre Hudson. They examined the counter fraud systems in place within 135 public sector bodies and 32 FTSE 100 companies. Combined, these organisations account for approximately one third of UK GDP, in the first snapshot of economy-wide fraud susceptibility.
Dr Button said: "This research lifts the lid on many large companies inability to effectively reduce fraud.
"There are huge gaps in the infrastructure needed to protect the UK from fraud and an urgent need to establish counter fraud goal posts.
"More detailed and regular research into the risk facing public and private organisations is essential to gauge how the UK is faring in the critical battle against fraud."
The study identifies an acute risk of fraud facing FTSE companies. While the incidence of weak fraud prevention was higher within the public sector, this is largely explained by the poor systems in place among smaller departments where little capital was in fact at risk, says the report. By contrast, FTSE companies perform poorly in the study irrespective of their size. As a result, the research calculates that only six per cent of public expenditure was at risk, compared with a 55 per cent risk to capital among FTSE companies with a combined annual turnover of £180 billion.
The findings indicate that the commitment within the private sector to tackling fraud is largely reactive, with 91 per cent of FTSE companies having whistle-blowing procedures in place and 84 per cent investigating suspected fraud.
By contrast, in terms of preventing fraud, only a slim majority (56 per cent) had a counter fraud strategy in place within the company, while less than half (47 per cent) had measures in place to review the effectiveness of this policy. More than a third (37 per cent) did not even report fraud-related measures to senior management or an appropriate division within the organisation.
Jim Gee, Director of Counter Fraud Services at MacIntyre Hudson, and Chair of the Centre for Counter Fraud Studies, said: “This is the first-ever analysis of the resilience of UK plc to fraud – and its findings do not make easy reading. The current spike we are seeing in fraud levels has a clear origin in the kind of weak preventative systems that this report lays bare. Taking a reactive approach to fraud is like closing the stable door after the horse has bolted, leaving some of the UK’s biggest and most respected companies highly vulnerable to fraudsters.
“Fraud is a global, economic problem that independent audited studies have shown typically involves losses of between 3%-8% of the income or expenditure concerned. Yet professional work to address the problem also shows that such losses can be reduced by up to 40% within a year.
“The choice is straightforward – organisations can either gain enormously from these benefits or they can continue to suffer unnecessary financial and reputational damage. Now is the time for companies to engage seriously with the critical issue of fraud in what is shaping up to be one of the most protracted periods of economic difficulty we have witnessed in decades”.
While large public sector organisations score more highly on fraud prevention than their FTSE 100 counterparts, the research reveals that the public sector is significantly less aggressive than the private sector in its pursuit of known or suspected fraudsters.
FTSE companies were much more likely to seek civil and criminal damage in the face of employee-related fraud. 63 per cent of FTSE companies would seek to apply sanctions beyond disciplinary proceedings, compared with only 30 per cent of the public sector.
Part of the reason for this divergence in the treatment of fraud across the public and private sectors is accounted for by the kind of financial crime committed. Typically, the public sector battles with high-volume, low-value fraud for which criminal redress is expensive. By contrast, fraud is typically lower volume but of far higher value in the large corporate sector.
The research also finds evidence of poor fraud-preventative policies in place within public sector organisations. Only a third (34 per cent) of public sector organisations surveyed had in place a dedicated counter fraud function, while 71 per cent failed to give any professional training to those responsible for counter fraud activities.
The study was commissioned by former government minister Frank Field. He said: “Whether we are citizens, consumers, employees, shareholders or taxpayers, what we need to know is how carefully the organisations and companies we rely on are protecting themselves against fraud.
“The current lack of care that most show leads directly to us incurring additional costs, or receiving worse public services, or having less secure jobs, or benefiting from a worse return on our investments. It is both unacceptable and erroneous to dismiss the seriousness of fraud or view it as a problem that is somehow untreatable. Now is the time for policymakers and the private sector to take a stand on this issue and demonstrate their commitment to combating head-on the destructive effects of fraud.”
The Centre for Counter Fraud Studies is now carrying out further research in counter fraud protection in the UK and expects to publish findings later this year.