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As we approach the general election, with all political parties struggling to devise ways of reducing public expenditure, there has been little comment about one way in which major savings can be achieved - and painlessly.
There is now the potential to make real savings, rather than just rhetorical ones, from reducing losses to fraud.
Fraud losses occur in expenditure on payroll, procurement, benefits, public housing, healthcare and education, and result in lost income across local and national taxation.
Fraudsters include staff and managers, contractors and citizens. A dishonest minority affects all public sector organisations of any size and the greatest financial costs are incurred from high volume, low value fraud, rather than vice versa.
Historically, the cost of such fraud has not been reliably quantifiable. If you can't measure a cost, how can you possibly plan to reduce it or, indeed, prove any subsequent reduction? However, the last decade has seen the development of accurate (+or- 1%) and statistically valid (95% statistical confidence) methodologies for treating fraud losses like any other business cost.
In this way 132 fraud loss analysis exercises have been undertaken in the last 10 years across 44 organisations in nine countries. These have been reviewing 32 types of expenditure with a total value of over £800bn – nearly a third as much again as total UK public expenditure.
The picture shown by the current data is unequivocal. Two thirds of the exercises show losses of between 3% and 9%, with an average percentage loss of 4.57%.
Between 1998 and 2006 I was chief executive of the Counter Fraud Service in the much-criticised NHS, one of the largest areas of UK public expenditure.
We achieved a reduction of losses by up to 40% within 15 months and up to 60% over eight years. This delivered over £800m in financial benefits at a return of 12:1 on the costs of the work.
Change the culture
What has been discovered is that the most effective way of reducing losses is in fact to change the culture – mobilising the honest majority of people, incentivising them with the clear financial benefits that flow from good practice, and creating strong peer group pressure against fraud.
By combining that pressure to do 'the right thing' with information targeted at the dishonest minority about the real risks of detection, investigation and sanctions, it is possible to deter – and significantly reduce – the dishonest minority.
This new approach may come as a shock to those brought up on a diet of cops and robbers TV shows such as 'The Sweeney', or more recently, 'Ashes to Ashes', but we now have the means to make fraud savings real, tangible and provable.
Furthermore, the news from around the world is that the scale of existing losses makes work to reduce them highly beneficial.
The statistics are dramatic: 4.57% of public expenditure for 2010 – 2011 equates to £31bn. Even a 40% reduction in losses, as was achieved in the NHS within 15 months - even if this happened twice as slowly - would be delivering recurring financial benefits of £12bn a year within three years.
This would be a real step forwards in closing the UK's existing budget deficit and safeguarding our public services painlessly and effectively.
Jim Gee is director of counter fraud services for MacIntyre Hudson LLP, chair of the Centre for Counter Fraud Studies at University of Portsmouth and author of The Financial Cost of Fraud Report (2009)
From Bubb's Blog
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