According to accountancy specialist BDO’s 2011 FraudTrack report, the value of reported fraud rocketed to more than GB pound 2 billion ( GB pound 2,095,341,000) in the UK last year. That figure represents a 50% increase on last year’s statistic of GB pound 1.4 billion and is the highest ever recorded for BDO’s annual survey.
Since FraudTrack’s launch in 2003, when fraud totalled GB pound 331 million, there has been a seven-fold increase in the cost of reported fraud.
The 2011 FraudTrack report collates data from all reported fraud cases over GB pound 50,000, and also shows a dramatic rise in both the number and average value of reported cases.
In 2011 there were 413 reported cases at an average value of GB pound 5 million compared with 372 cases in 2010 at an average value of GB pound 3.7 million.
Commenting on the figures, Simon Bevan (head of fraud at BDO LLP), said: “The fact that reported fraud is up is worrying, but not at all surprising. When the economic climate is difficult there is even more focus on the bottom line and driving out unnecessary costs, so fraud is more likely to be uncovered, but organisations need to be much more proactive when it comes to preventing fraud.”
Bevan has over 20 years’ experience of investigating fraud in the UK and over 20 other international locations. He previously set up two European market-leading fraud units and has investigated frauds in both the private and public sector.
In fact Bevan has worked on some of the world’s largest frauds as well as working for UK and overseas Government agencies.
Bevan added: “Too often risk teams are either too externally focused or fail to look at fraud from a financial point of view. Organisations need to be taking a P&L (profit and loss) approach to fraud risk. That is to say you look at your P&L and the areas in which you receive or pay the most monies will be where the greatest fraud risk lies.”
For example, if you are a cable manufacturer your greatest expenditure may be in the purchase of copper and if you run a call centre it may be payroll that is your biggest risk area.
“If companies continue to take a reactive approach to preventing fraud,” suggested Bevan, “I’m in no doubt that these figures will continue to rise year-on-year. You cannot design all fraud risk out of a business but you can put trip wires in place.”
Sector breakdown: what’s happening where?
While taken on face value those sectors such as finance and insurance appear to be tackling the issue of fraud effectively, the outlook is less positive for sectors such as construction – which is apparently failing to take the issue seriously – and retail, which has experienced a boom in reported fraud:
After dominating fraud figures in recent years, the finance and insurance sector only accounted for 27% of all reported fraud in 2011 compared to 56% in 2010, representing its lowest percentage in the last five years.
As stated there has been a boom in reported fraud in the retail sector, which accounted for 12% of all fraud in 2011 compared with 2% in 2010
The construction sector represents just 1% of all reported fraud compared with 34% last year.
“No sector is safe from fraudulent activity, which is having a serious impact on the bottom line for all industries,” outlined Bevan.
“Financial services institutions have invested heavily in systems and technologies to prevent and track fraud, so the fact that reported fraud in this sector has decreased as a percentage of overall fraud suggests this approach is working. However, there is still a long way to go.”
He continued: “The most serious frauds in financial services in terms of financial loss are often committed by employees and management, yet most of the in-house fraud teams within banks and the like tend to be made up of ex-policemen. They are often too focused on external ‘criminals’ dealing with credit card fraud and phishing, etc when the greatest risk is internal with bank employees committing commercial lending, mortgage or rogue trading fraud.”
Bevan feels it’s this “failure to take a holistic approach to tackling fraud” that can lead to those high profile, costly incidents we’ve seen in recent years.
On retail, Bevan stated: “Retail is a vulnerable industry, especially in the current economic climate. Given that 30% of all fraud is committed by suppliers and customers, it’s not surprising that this sector has been so dramatically affected. Tackling fraud can have a real impact on profit margins, and this should be a priority for retailers in these tough times”.
Commenting on fraud in construction, Bevan outlined: “That the figures are so low for this sector does not suggest to me that there is no fraudulent activity happening, rather that fraudulent activity is not being reported. Fraud and corruption have been a commercial reality in the construction industry for a long time, so the fact that so little is being reported indicates that organisations have failed to grasp that they need to bring their business practices up to date, especially in the wake of the Bribery Act.”
Types of fraud being perpetrated
Tax fraud accounts for the highest percentage of fraud committed at just over 36% and with an average cost of GB pound 13 million – significantly higher than the average across all frauds ( GB pound 5 million). As a percentage of overall fraud, tax fraud has steadily increased in recent years, from 15% in 2009 to 20% in 2010 and on to 36% in 2011.
After tax fraud, most fraud is committed by suppliers and customers (30%) with the average cost per supplier/customer fraud standing at GB pound 7.7 million. As a percentage of overall fraud this has also increased steadily, from 12% in 2009 and 18% in 2010.
Employee fraud is down to 10% from 14% last year. The average per fraud is ‘only’ GB pound 1.4 million which is substantially lower than the average across supplier/customer fraud and across all frauds
Cases of corruption are steadily increasing from less than 1% in 2009 to just under 2% in 2010 to 4% in 2011
Management fraud has been steadily decreasing, and this year’s figure is the lowest in four years (2011 – 5.5%, 2010 – 13%, 2009 – 24%, 2008 – 31%)
“Tax fraud is consistently high and this tends to be in the form of VAT fraud, such as carousel fraud,” explained Bevan. “This obviously impacts the public sector and we know that this is a key focus for the coalition Government which has voiced its intentions to cut the tax deficit. It will be interesting to see how this figure changes in the coming years.”
Bevan went on to state: “In terms of the private sector, there are still two main ways to defraud UK businesses. You either dilute the revenue coming in or overstate the costs going out. This has an impact on the types of fraud that we see in different industries. For example, in the service industry it’s easier to run a business within a business where revenue is diverted elsewhere. This is harder to achieve in, say, the manufacturing sector where such revenue dilution would result in stock losses. The manufacturing sector is, therefore, more likely to suffer a procurement fraud.”
In conclusion, Bevan remarked: “Both employee and management fraud have fallen dramatically. Management fraud has gone from 31% in 2008 to only 5.5% this year. We believe this is a reflection of the fact that ‘whistleblowers’ tend to keep their heads down at times of high unemployment.”
Key points about FraudTrack and BDO LLP
FraudTrack is prepared by BDO LLP and is based on all reported fraud cases over GB pound 50,000 between 01/12/2010 and 30/11/2011. The sources for the database are publicly available and include the UK’s national, regional and local press.
BDO LLP forms part of the international BDO network of independent member firms.