Public sector

Fraud risk, 'adequate procedures', and local authorities

Nick Marcar Nick Marcar

New laws to prevent fraud may affect the public sector covered plans proposed by the UK Government to expand the responsibilities of board members to address issues under the Bribery Act by covering other offences including fraud. We now address how this might affect the local government sector. Further articles will cover other sectors which provide public services as well as specific operational areas including payroll and procurement.

Local government provides a myriad of services akin to the complex nature of a conglomerate in the corporate sphere. There are some areas where receipts could be increased such as parking fees and rents, unlike the private sector which can increase prices to raise additional funds if there is sufficient demand. However, for local government, total income is largely driven by central government grants, business rates and council tax receipts. With restrictions on increases (and in some case reductions) in these areas, costs in other areas have understandably been closely reviewed. Counter fraud teams are often reduced as a consequence although this may have been in the context of an inadequate cost benefit analysis. Where fraud risks have not been fully assessed and likely losses unmeasured, many organisations, and not just those in the local government community, have taken the view that counter fraud is an easy target for savings.

If the new requirements follow Bribery Act guidance, future procedures will need to be proportionate, have top level commitment, cover assessment of risk, due diligence on third parties, be fully communicated including through training and be appropriately monitored and reviewed.

A proper risk assessment covering all of an authority's activities will be the driver. Some activities will be identified as having a low fraud risk and from this it will follow that counter fraud procedures will be appropriate to the low risk identified. Other areas such as those with high spend or high receipts may be identified as high risk areas and support the focus of counter fraud resource. And this should not be a one off exercise. Counter fraud procedures should be reviewed at regular intervals to ensure they are still fit for purpose.

This is not as daunting as it might first appear or require substantial cost or time. Authorities already have a statutory duty to make arrangements for the proper administration of their financial affairs so should have at least the basis of these procedures in place. As practice note 10 of the Auditing Practices Board sets out, the Accounts and Audit Regulations require the 'responsible financial officer' in English local authorities to determine accounting control systems that include measures to enable the prevention and detection of inaccuracies and fraud. There are similar provisions in Welsh, Scottish and Northern Ireland specific legislation. 

If legislation is introduced, adequate procedures will not just be good practice but protect the authority's senior management, from potential criminal proceedings. The introduction of such measures may be viewed by some in local government as yet another imposition of regulation and additional cost. However, this approach fails to reflect the value they bring. There are undeniably pressures on local authorities that work against the introduction of adequate procedures. Lack of staff generally, lack of expertise in fraud prevention as opposed to investigation and pressures to undertake other activities are just three. However, managed effectively, adequate procedures can bring real financial value to local authorities.

Asking the question whether counter fraud procedures in place are adequate gives the opportunity to independently review existing measures. For example, is sufficient resource directed at high risk areas where prevention will bring the greatest benefits? Have procedures changed since the last risk review and are any new risks properly addressed? Are automated transaction alerts in place to flag up issues of potential concern?

This will also be a good time for authorities to question their overall approach. We have been working with a number of local authorities reviewing a hub system where one authority can provide counter fraud services to a group or where counter fraud specialists within different authorities work together so that the range of different counter fraud skills available are utilised efficiently.

On specifics we are finding there is work to do; three areas that regularly arise are:

  • data sharing not just with other public sector bodies but also between departments in the same local authority. While there are legal issues in some circumstances this is often parked in the 'too difficult' box rather than fully addressed. This is unfortunate since fraudsters do not recognise local authority boundaries and are likely to undertake more than one type of fraudulent act if the opportunity arises.
  • contracts with third parties which are costlier than expected and/or do not provide the results envisaged. This may cover a mixture of fraud and error which are sometimes difficult to differentiate. Our work in this area has recovered substantial amounts compared with contract value, particularly against a background where there is limited expertise or resource in house to undertake effective monitoring of contract performance.
  • recoveries of monies defrauded. Many local authorities rightly publicise criminal convictions for fraud on their website but there is much less comment about any monies recovered as a result. In our experience insufficient thought is given to civil recovery measures which can be much quicker and effective and arguably have a greater deterrent effect. 

So where does this leave us? The timing of any potential legislative change is unknown but there is good reason for authorities to review their counter fraud systems now and ensure a truly proactive approach is in place. The Fraud Error and Debt team at the Cabinet Office has established a counter-fraud framework for central government covering all aspects of counter fraud with a particular focus on proactive measures and is currently drafting standards for each. Following implementation across Whitehall it is likely that the Government will consider how this could be reflected across the public sector as a whole, including local government.

While accurate figures are hard to ascertain, the latest figures published by Government estimate losses to the sector are approximately £2 billion, with this considered an underestimate. Individual authorities should consider asking themselves how much of this amount is attributable to their authority, how is it being addressed and is it sufficient to deter both the determined and the opportunistic fraudster? A focus on adequate resources now will enable authorities to assess with increased certainty what is required to address the counter fraud threat, ensure that public funds are used for public purposes, and in due course give added comfort and legal protection to senior leaders that counter fraud measures in place are fit for purpose.