Review reveals local government procurement fraud risk

2 July 2020: A government report has stressed the importance of best practice in reducing fraud, particularly at a time of heightened council activity and less stringent controls in operation.

In June 2020, the Ministry of Housing, Communities and Local Government (MHCLG) published a report on the risks of fraud and corruption in local government procurement, estimated to cost between £275m to £2.75bn. This is money that could otherwise have been spent on public services and so is a problem that impacts on all of us.

One conclusion from the report is that there is no accurate picture of fraud and corruption in local government procurement and how much it actually costs. 

The amount spent by local government on procurement is substantial – some £55bn each year – yet there is no consistent identification and reporting of fraud cases to enable data to be collected and thus a strong picture to be built up. Partly this is due to a lack of clarity in the definitions of fraud leading to inconsistent reporting, but there is also a lack of specialist experience and capability in preventing, detecting and investigating procurement fraud and corruption. 

The report also highlights that there is no mandatory fraud training undertaken across all local authorities. It is often not recognised that fraud can take place throughout the procurement cycle – not just in the tendering process. Once a contract has been awarded the opportunity for fraud does not lessen. More people are employed in carrying out procurement than in the contract management phase, yet this is often when fraud takes place. 

The Cabinet Office has recently launched a contract management capability programme, which has been piloted by some local authorities. However, this is an area which needs to improve as so far, the report finds that the majority of councils have not yet carried out contract management training.

When counter-fraud capability is developed this leads to a rise in the detection and reporting of fraud incidents. The counter-fraud function is supported by the new government counter-fraud profession, whose functional standards are currently only applied within central government bodies.

The report features case studies which highlight the broad range of fraud and corruption that exists, but equally shines a light on some best practice adopted by different councils to prevent and detect fraud. These are useful resources that should help councils to prevent and detect fraud in contract management.

A lack of commercial awareness in an increasingly commercialised sector can in itself lead to poor-value-for-money decisions being made and/or a vulnerability to being fraudulently exploited by third parties or council’s own staff. As with many of these types of transactions, if it looks too good to be true then it probably is!

It is important that the correct ‘tone from the top’ is adopted ie a zero-tolerance attitude to fraud is fully supported. This can be seen in councils that adopt policies and procedures including, for example, anti-fraud, bribery and corruption policies, gifts and hospitality procedures. These types of policies are the first step – audit and risk committees should be challenging in their scrutiny of procurement activities and be aware of the potential risks that councils face. 

One method of post-procurement scrutiny is open-book accounting, providing councils with the right to inspect the accounts of suppliers with respect to public contracts. Unfortunately, the report shows that open-book or similar clauses are only included in contracts in a minority of cases.

It is clear from the report that although fraud can never be completely eliminated, councils have work to do in reducing its occurrence in procurement. Sharing best practice and working across council boundaries by using shared service functions, can be an effective way to invest in counter-fraud activity.

Alison Ring, director for public sector at ICAEW said: “This report makes a number of suggestions on how the government can champion improved counter-fraud activity in local authorities. The Local Government Association also has a part to play to encourage improvement and enable best practice to be shared.

“All local authorities have a responsibility to improve their understanding of procurement risks and to build counter-fraud capacity and capability. They need to build an anti-fraud culture in which all teams work together to ensure that procurement practice is as robust as possible. 

“The requirement for councils to move quickly in providing financial support to genuine businesses and individuals in need increases the opportunity for fraudsters at a time when local authorities are under financial pressure. With less time to conduct checks there is no doubt that instances of fraud will increase, and councils therefore must do even more to prevent and detect fraud and corruption.”