Most public bodies do not know how much fraud they face and cannot demonstrate that they have the correct level of counter fraud resources, according to the National Audit Office (NAO).
The amount of fraud in government expenditure that was reported in the accounts audited by the NAO rose from £5.5 billion total in the two years before the pandemic (2018-19 and 2019-20) to £21 billion in total in the following two years. Of the £21 billion, £7.3 billion relates to temporary COVID-19 schemes. 1 These estimates are in addition to an estimated around £10 billion of tax revenue lost to evasion and crime every year.
The Public Sector Fraud Authority (PSFA) – established last year in response to concerns about fraud during the COVID-19 pandemic and the lack of a coordinated response – has a broader estimate that includes both fraud and error but excludes expenditure specific to the COVID-19 pandemic. It estimates that in 2020-21 there was between £33.2 billion and £58.8 billion of fraud and error in government spending and income unrelated to the pandemic.2 This is out of £1,106.1 billion of expenditure and £608.8 billion of HMRC tax income.
The vast majority of government’s counter-fraud capability sits within the Department for Work & Pensions and HM Revenue & Customs, where the largest known risks exist. However, outside of tax and welfare, most departments have little counter fraud capability and cannot demonstrate that this is proportionate to the level of fraud they face.
Government’s vulnerability to fraud increased due to its response to the pandemic. The NAO found that public bodies could have better managed the fraud risk without impairing their emergency response. These include faster transparency, better management of conflicts of interest, addressing known vulnerabilities more quickly, and timely financial reporting.
The PSFA has assessed government’s counter fraud understanding, resourcing, and the outcomes it achieves from its counter-fraud resources. It found only 14% of the 70 organisations assessed understand and measure the fraud and error risks that they face and just 6% could demonstrate a strong return on their counter-fraud investment. PSFA also found that even without specific measures of fraud and error risk, 27% of the organisations it assessed showed clear signs of a mismatch between their resources and risk.
Government has made some progress since the NAO last reported in 2016.3 It established the Government Counter Fraud Function (to bring together 13,000 people working on counter fraud activity across the public sector) and the Government Counter Fraud Profession (to support the development of capability for counter-fraud professionals across government) in 2018 and the PSFA in 2022, to act as government’s centre of expertise for the management of public sector fraud and associated error against the public sector.
The NAO concludes that the creation of the PSFA presents an opportunity for a renewed focus on fraud and corruption, but that it will need to be influential across government to achieve the required changes in culture, preventative approach, and robust assessment of risks.
The NAO has set out nine insights on measures the PSFA can take to help government reduce the extent of fraud and corruption4. Departments need to work together to fight fraud; demonstrate best practice controls and transparency; set a counter fraud culture; adopt prevention techniques; and use investigative powers as a deterrent.
The PSFA can also help departments by developing a better methodology to assess and measure fraud; developing the counter fraud profession; helping departments harness and use data to prevent fraud and corruption; and by bringing counter fraud expertise into the design of new programmes and systems.
“There has been a substantial increase in the level of fraud reported in the annual reports and accounts we audit. In addition to the loss of taxpayer money, it creates the risk that people come to perceive fraud and corruption across government as normal and tolerated. If not tackled, this could affect public confidence in the integrity of public services.
“Government has more to do to understand the scale of the problem it faces and cannot yet demonstrate that it is tackling fraud effectively. The creation of the Public Sector Fraud Authority creates a real opportunity to address this.”Gareth Davies, head of the NAO.
Read the full report
Notes for editors
- These figures likely understate the scale of the problem because they exclude any amounts that are too small to be reported in the context of any one set of accounts and no estimate was made of the level of fraud in the Department for Health and Social Care’s COVID-19 spend.
- PSFA is unable to be more accurate with its estimate due to the inherent uncertainty over the extend of fraud and error.
- This report follows our previous work which found government did not have a good understanding of fraud before the pandemic. In our 2016 Fraud landscape review we found there was a large disparity between the level of fraud and error that UK government reports and the level reported by other governments and the private sector. The NAO conducted its fieldwork between September 2022 and March 2023.
- The NAO sets out nine insights in its report:
a. Demonstrate best practice financial control and transparency. Public bodies must demonstrate that they have put in place the basics of good governance and financial management, are transparent, and have assurance that their controls are working effectively.
b. Act as ‘one government’ in tackling fraud. PSFA will need to work in partnership with Departments such as HMRC and DWP which contain most of government’s counter fraud capability and win the support of departments with less capability. It needs to set out clear business cases for each of its services to demonstrate to others why they should use them.
c. Set an anti-fraud and corruption culture. Leaders need to set the right tone from the top on tackling fraud and corruption. They also need to celebrate the detection of fraud and corruption to encourage people to speak up and to learn lessons.
d. Develop robust assessments of the level of fraud and corruption. PSFA aims to produce a global fraud risk assessment that summarises the level of fraud across government and highlights areas where more action is needed. It needs to develop a methodology to assess the levels of fraud and corruption that public bodies can use in a proportionate way and which provides both sufficient information and coverage to inform decision making
e. Embrace a preventative approach, tailored to the risks of each area. Public bodies should aim to demonstrate cost effective controls that minimise the risk of fraud and corruption as much as possible while also securing their other objectives. Taking a fully preventative approach will require effort beyond the counter-fraud profession.
f. Develop the counter-fraud and corruption profession. Adopting more preventative approaches will require a new cadre of counter-fraud and corruption professionals capable of working with other professions to assess risks and develop digital and operational means to tackle fraud
g. Harness and use data to prevent fraud and corruption. But government efforts to use data are hindered by both technical and legal challenges. Government also needs to do more to improve public confidence in the use of data analytics to detect and prevent crime and the impact that this can have on different user groups.
h. Design out fraud and corruption from new initiatives and systems. One of the key lessons from the level of fraud in government’s COVID-19 response is the need to design counter-fraud measures, including controls, reporting and recovery, into new initiatives at an early stage. PSFA has introduced a process for new Initial Fraud Impact Assessments to assess the risks and design mitigations. PSFA and departments now need to show they can make this work.
i. Use its investigative powers and capabilities as an effective preventative deterrent. Public bodies need a means of judging the appropriate balance between criminal prosecution and civil recovery, the means and powers to pursue crime and to clearly communicate their enforcement activities to act as a deterrent.
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