Storing up trouble
The Audit Commission is to be abolished but its work in tackling fraud has been a significant contribution. Andrew Gillett analyses the ongoing risks in relation to procurement and warns public sector organisations against cutting back on counter-fraud activity.
The future of the Audit Commission’s extensive historic investment of both finance and time in public sector projects, products and publications hangs in the balance as a result of the government spending cuts. However, it may have left a lasting legacy in the form of Protecting the Public Purse 2010, a report on counter-fraud activity that remains positive in its address of counter fraud risks and prevention measures both present and for the future.
In its report, the Commission – presently tasked with promoting value for money for tax payers and with auditing the £200bn spent by 11,000 local public bodies annually – gives clear and concise statistical information and advice with reference to real examples outlining both the ongoing requirement to tackle, and the benefits that can be realised from addressing, commonly recognised issues of fraud in areas such as unlawful housing tenancy arrangements, single person benefit and blue badge fraud.
Headline savings from the report need no further amplification save to clarify they are real examples where tangible results have ensured the proper allocation of ever constricting resources to those most in need in our local communities:
- Fraud causes annual losses of over £30bn, equating to £620 lost to fraud for every adult within the UK
- Local Government detected fraud in 2009/2010 amounted to £135m arising in 119,000 individual fraud cases
- Detected blue badge fraud was valued at £2m in 4,097 detected cases
- False insurance claims were valued at £2.8m
- 1,600 social housing properties were recovered by 60 councils last year
- Leicestershire City Council’s experience clearly demonstrates the benefit of investment in counter fraud activity after it raised £1.3m in additional council tax revenue from tackling fraudulent single person discount claims.
The report not only emphasises the importance of continuing with the levels of investment to date but moves ahead to consider where further significant risk of fraud in local government exists. It advises that the time for addressing these additional targets is now.
The three distinct risks identified exist within:
- Personal budgets (direct payments) and their provision
- Housing and council tax benefits
- Procurement
While all three areas should be addressed with equal commitment, the potential losses – and as such the potential savings that may be achieved – in procurement warrants early attention. The £80bn spent by councils annually in purchasing goods and services from suppliers and funding major construction projects make this a priority area, particularly in light of the introduction of the Bribery Act 2010 in April of 2011 since a clear overlap exists.
Losses through ineffective procurement processes, and the adequate policing of arrangements that do exist, are not restricted to the realms of the private sector despite the considerable publicity such identified fraud is given that suggests a degree of public sector immunity from the risk. The £2.25m fine paid by Balfour Beatty in 2008, the Office of Fair Trade’s total fines of £129m levied against of 103 constructions firms found guilty of unlawful collusion following its investigation into alleged bid rigging in major cross sector building and construction contracts in 2009 and the financial penalties levied upon BAE Systems in the both the UK (£30m) and the USA ($400m) in 2010 stand as salutary examples of the size of the problem.
Emerging risks have been caused by the substantial reduction in public spending, and consequently the number of grants and tenders for the supply of goods and services on offer. As a natural consequence the competition, desire and in extreme instances the simple need to win those contracts increases, as unfortunately does the risk of procurement rigging and fraud.
Contracts or grants may be awarded unfairly as a result of bribery, inadequately or poorly performed as a result of forced savings in a project’s costs to improve a bid’s competitiveness, or completed other than in accordance with specifications due to a lack monitoring delivery.
In real terms, this may mean a contract to develop a local community playground goes to other than the ‘best’ bidder. The playground may also have been delivered using substandard materials and build methods in order to improve the margin for profit, and this may have gone undetected due to lack of performance monitoring. The potential consequences in terms of an injury to a child hurt as a result of a structure failing and losses – either financially or to reputation – may be devastating.
The view for the future isn’t as gloomy as it first appears, however. There are solutions that may, and should, be employed to ensure this scenario does not arise and that local government and council procurement activities are awarded appropriately and fairly, while maintaining transparency in the perception of both the local community and the general public. The launch on 8 November 2010 of the new government website providing details of all government departments’ plans, milestones and measures of performance is an indication of the importance of transparency in public sector activity.
In terms of acting now, the first step is appreciating that there is no solution to the immediate financial crisis in simply cutting back on investment in counter fraud activity. To do so, while affording an immediate short term saving, only serves to create greater public suffering and far most costly problems in the long term, as the prevalence of undetected and unchallenged fraud inevitably increases.
The second is in recognising the benefits that can be derived in joining forces and of shared best practice, shared knowledge, data and information. An extract from the address given by Lord Ashdown at the recent annual conference of the CIPFA Better Governance Forum, chaired by Derek Elliot from the Audit Commission, resounds clearly in its relevance to every local authority and council charged with serving the public need as well as protecting the public purse. “The capacity to work with others is paramount.....The most important part of what you can do is what you can do with others,” Lord Ashdown said.
The third step is the application of the wealth of existing knowledge, experience and material that is already freely available to a local authority’s individual requirement without the necessity and associated costs of re-inventing solutions to existing problems. The Audit Commission report draws directly upon advice previously given by CIPFA in that those responsible for governance should ensure their own organisation has:
- Effective corporate procurement arrangements, by comparing their arrangements with good practice
- Proper arrangements for reporting suspected fraudulent or unethical behaviour
- Included procurement in the annual internal audit programme
- Ensured frauds detected and lessons learned are shared effectively throughout the council.
These admirable high level objectives should be supplemented with actual procedures to identify and guard against instances of procurement fraud arising, such as the application of the 19 point corruption indicator checklist proposed by the Serious Fraud Office or a council advertising its procurement policy and strategy in clear terms and the evaluation criteria against which tenders will be measured, along with the publication of the results of any tender exercise.
In 2004, Kofi Annan addressed the UN Convention against corruption describing the effects as: “an insidious plague that has a wide range of corrosive effects on societies……..leads to violation of human rights, distorts markets, erodes the quality of life and allows organised crime, terrorism and other threats to human security to flourish. Corruption hurts the poor disproportionately by diverting funds intended for development………feeding inequality and injustice”.
Although spoken six years ago before an international forum of observers, these words are of direct significance to the risks faced by our public sector, and specifically local government departments, today. As such, they should be the backdrop against which decisions upon future investment in counter fraud activity should be measured.
With the risks of irregularity in procurement, fraud and corruption increasing, now is not the time to cut counter fraud investment. Instead we should work with our partners and colleagues in sharing the burden of that investment, as well as the benefits greater awareness and shared knowledge brings.
Andrew Gillett is a partner and head of casualty fraud at Weightmans LLP, specialising in counter fraud strategy, claims handling and sanctions. He can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it..
