Spending watchdog accuses public bodies of not knowing how much fraud they face

A report by the National Audit Office (NAO) has revealed that most public bodies do not know how much fraud they face and “cannot demonstrate that they have the correct level of counter fraud resources”.

The report revealed that 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. These estimates are in addition to an estimated £10 billion of tax revenue lost to evasion and crime every year, said the NAO.

The NAO suggested that one of the “key lessons” from the level of fraud in the government’s COVID-19 response was the need to design counter-fraud measures, including controls, reporting and recovery, into new initiatives at an early stage.

The Public Sector Fraud Authority (PSFA) has a “broader estimate” that includes both fraud and error but excludes expenditure specific to the COVID-19 pandemic, the report said.

The PSFA estimated 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. This is out of £1,106.1 billion of expenditure and £608.8 billion of HMRC tax income.

The NAO said the PSFA is “unable to be more accurate with its estimate due to the inherent uncertainty over the extent of fraud and error”.

The spending watchdog noted that 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”.

It added, however, that “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.”

The report said that the PSFA had 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, the NAO said.

The spending watchdog has set out nine insights on measures the Public Sector Fraud Authority (PSFA) can take to help government reduce the extent of fraud and corruption:

• 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."
• Act as ‘one government’ in tackling fraud – Departments should work together.
• Set an anti-fraud and corruption culture - "Leaders need to 'set the right tone from the top' on tackling fraud and corruption."
• 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.
• Embrace a preventative approach, tailored to the risks of each area
• Develop the counter-fraud and corruption profession - Adopting more preventative approaches will require a “new cadre” of counter-fraud and corruption professionals
• Harness and use data to prevent fraud and corruption.
• Design out fraud and corruption from new initiatives and systems.
• 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."

The NAO concluded that the creation of the PSFA presented an opportunity for a “renewed focus on fraud and corruption”, but that it would need to be “influential across government to achieve the required changes in culture, preventative approach, and robust assessment of risks”.

Gareth Davies, head of the NAO said: “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.”

Lottie Winson