At the NAO we are making it our business to invest in how we help and hold government to account for fighting fraud. Billions of pounds are at stake here. So it’s an absolutely critical issue.
As I came to the end of my six-year audit rotation on the Department for Work & Pensions (we have to move every seven years) I just assumed I would move to another large department.
Instead, my boss, the comptroller & auditor general and head of the NAO, Gareth Davies, asked me to take on a new role to build a team solely focused on improving government’s approach to tackling fraud and maintaining propriety.
I instantly jumped at the chance. Let me explain why.
We have seen a doubling in reported fraud against government since the start of the Covid-19 pandemic
We all know the government’s pandemic response involved making difficult decisions at pace that increased its exposure to fraud. The accounts we audit reported £7.3bn of fraud in the Covid-19 schemes (and that excludes health where we could not fully audit the spend). But sadly, this wasn’t a one-off.
We have seen a doubling in reported levels of fraud and error in government expenditure since the pandemic to around £10bn a year. This is largely driven by a sustained increase in benefit fraud since the introduction of Universal Credit, but also by other areas of government getting better at recognising and reporting fraud and error.
The fact we are able to report these numbers is due to a key strength of the UK system of accountability – we have to estimate the extent of fraud and error where it is material to the accounts.
Not all countries do this, and we stand out for our transparency. This encouraged the government to take action. It set up the Public Sector Fraud Authority (PSFA), enhanced requirements around fraud risk assessment, and invested more in high-risk departments.
"Actual levels of fraud are likely to be far higher than what we see reported"
That said, as we reported to parliament, outside of tax and welfare most areas still don’t have proper risk assessment mechanisms and are unable to accurately measure the extent of fraud. Actual levels of fraud and error are likely to be far higher than what we see officially reported.
Really, it’s the tip of the iceberg.
Tackling fraud presents a massive opportunity to save money
Fraud and error are not only a social wrong, but a real cost to the taxpayer. They can also be reduced if managed well. We want government to view fighting fraud and error through the lens of achieving large efficiency savings. These savings could run into billions of pounds a year. Money that would be heartily welcomed by any chancellor.
Too many public bodies say they have a “zero tolerance for fraud” but have not properly assessed the risk they face, invested resources in detecting fraud, or actually been honest about the extent of loss they inevitably have in contracting and grants.
Two thirds of counter fraud staff work on investigation, not prevention. That means we are missing a trick in terms of prevention. And the two big risk areas – tax and welfare – have 84% of all counter fraud staff. While its right that the bulk of effort is focused there, the current set up has left the rest of government with far too few fraud specialists focused on risk assessment and prevention to develop and maintain fraud controls.
We hope we are seeing the start of a change
The PSFA is focusing on training a new cohort of counter fraud leaders and fraud risk assessment and prevention experts. And the Treasury now requires all new schemes that go through its approval process to have an initial fraud risk impact assessment. Those with a high risk are monitored.
We now need to see this followed through with the fraud risk management cycle properly embedded in programmes across government. That means:
- Proper risk assessment of schemes
- Design of preventative controls against those risks
- An inspection and monitoring regime that tests not only whether those controls are working, but also an estimate of the extent of fraud and error
- Evaluation of the root cause of fraud and error
This cycle then needs to be repeated continually and faster than fraudsters can find new ways of attacking the system.
Audit is here to help
Our audits of accounts and reports to parliament will encourage all of this thinking. We want government bodies to get better at reporting estimated losses from fraud and error in their accounts.
This is only possible if they do proper risk assessments and have inspection and monitoring regimes in place. Good reporting drives good management. A fuller picture of where the big fraud and error risks lie is desperately needed. We will continue to highlight the fraud risks in our value for money reports and make recommendations on how they can embed the fraud risk management cycle.
In time, we expect to see government reporting large returns on investment. Could this truly be in the billions?
Given current estimates of loss are clearly underestimates, we have every reason to believe so.
Joshua Reddaway is director of fraud and propriety at the NAO
Read the recent NAO report: Lessons learned: Tackling fraud and protecting propriety in government spending during an emergency