Internal public sector fraud on rise as cuts bite, says PwC

Spending cuts and pay freezes are leading to a sharp rise in the level of employee and sub-contractor fraud against public sector organisations, according to a new study by accountants PricewaterhouseCoopers (PwC).

PwC said that internal fraudsters were now reported to be responsible for 53% of detected economic crime, compared with 39% in 2009, making internal fraud more common than external fraud – which represented 43% of detected economic crime - for the first time. Overall, PwC said that 60% of the 110 public sector organisations it surveyed had experienced fraud in the last twelve months, up from 52% in 2009,

In part, the  report added, the increase in detected internal fraud was due to increased scrutiny of spending following the announcement of public sector cuts, but also said that cost-cutting initiatives were also creating new opportunities and incentives for fraud. PwC economists estimate that those on average incomes in the UK will currently be suffering a ‘squeeze ‘ of over £1000 annually, thanks to ‘everyday’ inflation running at a higher rate. Overall, 74% of respondents said that the Spending Review has increased the risks of economic crime.

Ian Elliott, a partner in PwC, said: “An increased focus on costs within organisations may be uncovering scams and frauds that have run for years, but the impact of spending cuts could also be playing a part as loyalty and employee engagement are tested by redundancy announcements and pay freezes. In these scenarios there is an increased risk of some employees (and indeed sub-contractors) maximising their benefits on the way out through fraud.”

The survey also found that accounting fraud had, for the first time, overtaken asset misappropriation as the number one economic crime in the public sector. Accounting fraud encompasses a variety of actions including accounting manipulations, fraudulent application for credit and unauthorised transactions.

Ian Elliott  said: “More opportunities for fraud are created as mid-office functions are stripped away and responsibility for auditing and authorising activity is spread more thinly. To combat this, regular fraud risk assessments are essential to identify the types of frauds likely to occur.

“New techniques such as Continuous Transaction Monitoring can help local authorities and other public bodies identify areas of fraud risk by identifying anomalies in existing management data thus uncovering duplicate invoice payments, false suppliers and unauthorised transactions.”

A copy of the report is available via PwC's website at http://www.pwc.co.uk/.