BDO’s interim 2012 “FraudTrack” report has some fascinating results concerning fraud trends in the UK and for the public sector it isn’t easy reading.

It is worth noting before reading the extract from the BDO report that the data only relates to frauds of £50,000 or over. This leaves a considerable amount of discussion on the decline or growth in smaller areas of fraud for instance Credit Card fraud which is never likely to exceed £50,000 due to improved fraud prevention techniques.

 “Fraud reporting habits are increasingly being influenced by fear of reputational damage” says Simon Bevan, Head of Fraud Services at BDO LLP, as the accountancy firm releases its 2012 Interim FraudTrack report.

The report states that the total value of reported fraud plummeted to £424m between December 2011 and May 2012.

The report indicated

  • a 54% drop on last year’s figure against the 2011 figure of £920m
  • a 55% decline in the average value of fraud, which fell from £4.5m to £2m
  • an increase in the number of cases reported, with 212 cases between December 2011 to May 2012, in comparison with 204 in the same 2011 period

The report has a breakdown by sector

  • Public administration has seen the highest value of fraud reported in this 6 month period, accounting for almost £253m – 60% of the all fraud reported. This has fallen 41% from the 2011 figure of £431m.
  • The Finance & Insurance Sector accounts for 17% of all fraud in the period (£71m). This has fallen 74% from 2011 when the recorded figure was £274m.
  • Fraud in the retail sector stands at £49m, just 12% of the total figure. However, this has risen dramatically from last year’s figure of £11m – a fourfold increase.

Simon Bevan commented: “The only sector where we’ve seen an increase in the value of fraud reported is in retail. This is a sector which is currently under a lot of pressure, so this isn’t particularly surprising. Fraudulent activity is often uncovered when businesses are paying closer attention to their finances, especially in situations such as property acquisition and store refurbishment.”

Breakdown by type of fraud

  • Tax fraud accounts for the greatest amount, at £249.5m – 59% of all fraud for this period.
  • After tax fraud, management fraud accounts for 9% (£39m).
  • Mortgage fraud is down dramatically from last year’s figures, currently sitting at around £9m (just 2% of total fraud) in comparison to last year’s £82m.
  • Employee fraud counts for £34m (around 8%) – again, down significantly on the same period last year (£192m).
  • Procurement fraud has dropped dramatically, from £25m last year to £3m in 2012.
  • Third party fraud has more than halved in the same period from £78m between December 2010 and May 2011, to £30m in the last 6 months.

Breakdown by location and for the first time in 6 years, London has not been the location with the highest amount of reported fraud.

  • The Midlands: £184m
  • London: £165m
  • North East: £38m
  • East Anglia: £16m
  • North West: £9m
  • West Country: £5m
  • National: £4m
  • Northern Ireland: £1m
  • Wales: £1m
  • Scotland: £700k

Simon Bevan commented: “This really is a dramatic fall. This year’s interim figures are not even a quarter of last year’s total, which was more than £2bn between December 2010 and November 2011. That said, it’s important to remember that these only represent fraud which is reported to the police. In fact, it is in the area of civil investigations and prosecutions in which BDO is most active. We certainly haven’t seen less fraud occurring.

So what does it tell us? Despite this drop in value, we’re actually seeing more cases going through the system, but of lower value. We suspect that organisations are only bringing in the authorities for small, relatively simple frauds. If that’s the case, I’m in no doubt that reputation management is a key factor in this decision. Organisations just don’t want to air their dirty linen in public. It would appear that the police are no longer the first port of call when it comes to dealing with the larger, complex frauds that can be so damaging to reputation.

We’ve certainly seen this in our own work. Whilst quantum has historically been the key driver for our appointment in fraud investigations, reputational issues have become much more important. Organisations are increasingly aware of the impact that reputational damage can have in terms of loss of earnings, loss of future customers, unsettled employees, increased regulatory oversight and damage to share price, amongst other things!

There are other reputational issues at stake that can have far reaching consequences. Take for example a case where a fraudster convinces the accounts payable team to change supplier contact details and bank account details. This is a simple fraud but something we are seeing increasingly, the result being that millions are then paid away to a bogus account. The reputational impact of a supplier not receiving their payment on time is significant. Such circumstances could force that supplier to reconsider their association with you and ultimately affect your ability to run your organisation. Most frauds like this one are not complex and could easily be prevented by simple due diligence, but one thing they do have in common is their impact on your reputation”.

The original BDO post can be found here.

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