Growing complexity of systems and processes, the inability of controls to keep up with the increasing pace of change in business, and fraudsters feeling more distant from the victims of their dishonesty are among the reasons for the spike in fraud, according to the latest Financial Cost of Fraud report produced by Crowe and the University of Portsmouth Centre for Counter Fraud Studies.
The report says a perception that many societal ‘role models’ - be they MPs, senior executives or other public figures - are dishonest is eroding the anti-fraud culture. It also warns that we’re no longer seeing an inverse correlation between fraud and economic trends – historically fraud would increase during a recession and fall when economic prosperity returned, but since 2007 that is no longer the case.
Although the analysis predates the pandemic, the Office for National Statistics has already said it anticipates that incidents of fraud will increase by almost 20% since COVID. Report author Jim Gee, Partner and National Head of Forensic Services at Crowe UK, warned that many organisations’ fraud prevention strategies were no longer fit for purpose.
“Too many organisations adopt a reactive approach to fraud, seeking only to tackle it once losses have already occurred. That’s an antiquated viewpoint and a change of perspective is needed,” Gee said. “They need to review, revise and improve their protection. Only about a third of fraud at best is detected but fraud is an ongoing cost that is making companies less profitable, making public sector organisations less able to deliver public services and charities less able to fulfil their charitable purposes. It’s the cost that does the most damage,” Gee said.
However, those that know the extent of their fraud losses are better at reducing them. The report reveals that losses can be, and have been, reduced by up to 40% within 12 months, which if applied UK wide could result in annual savings across the UK of up to £55bn - more than the UK government’s defence budget in 2019-20. “What companies need to realise is that they are more profitable if the cost of fraud is no longer there. Data shows the return on investments to tackle fraud can be 12:1 or better,” Gee said.
A focus on growing and mobilising the honest majority and shrinking and deterring the dishonest minority would allow organisations to change the balance of human behaviour and reduce the amount of fraud attempted, Gee said. He urged organisations to communicate the damage caused to the business by fraud, the likelihood of misdemeanours being uncovered and that use of appropriate sanctions including prosecutions if frauds were detected.
Companies also needed to design weaknesses out of processes and systems to remove opportunities for fraud. Meanwhile, if fraud is detected you need the capacity for a professional investigation. “That’s not simple – there are at least 18 statutes relating to how an investigation needs to be conducted and if you don’t do it properly you can find yourself being sued on the basis of data protection, human rights or employment law,” Gee warned.