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How COVID-19 grant-making drive inflamed councils’ fraud vulnerabilities

Author: ICAEW Insights

Published: 13 Jul 2022

Starved of counter-fraud funding for a decade, local councils were left dangerously exposed to financial wrongdoing at the height of the pandemic, says new report.

‘Hollowed-out’ local authorities were forced to swim against a tide of fraud while managing spring 2020’s flood of COVID-19 support payments, according to a new report from the Fraud Advisory Panel (FAP)

Published on 5 July, Running on Empty paints a bleak picture of under-resourced councils battling against the elements as central government urged them to cram through the 4.5 million individual payments – worth more than £22bn – that formed the third pillar of the UK’s economic support plan in the earliest phase of the pandemic.

Funded centrally, but administered locally, the payments quickly spawned tensions between councils and Whitehall: while many authorities were keen to harness local expertise to carry out pre-payment fraud checks, they were simply told that speed was of the essence.

After some councils chose to run pre-payment checks anyway, central government began to publish league tables of local grant-making performance. As such, the most cautious councils were immediately pushed to the lower ranks.

Deep cuts

Central government guidance requiring councils to develop pre- and post-payment assurance schemes for all three pillars of COVID-19 relief didn’t emerge until June 2020 – more than two months after the first grants were issued. By the time pre-payment checks became mandatory in April last year, the three main support schemes had closed and half of the money had already been distributed.

In hearings on COVID-19-related grant fraud before the Public Accounts Committee, central government officials said that local councils were judged to be better equipped than BEIS to manage fraud risks because they dealt with them daily. “In reality,” the report states, “councils’ counter-fraud capabilities have been hollowed out over the past decade, accelerated by the transfer of housing benefit investigators to DWP in 2014.”

From 2009 to 2020, deep cuts in central funding – together with a real-terms freeze on council taxes – slashed local authorities’ spending power by 29%, blunting counter-fraud effectiveness, the report says. 

The report also cites a recent BBC probe that showed that 170 councils struggling to recover from the pandemic have found a collective £3bn ‘black hole’ in their budgets – leaving some at risk of bankruptcy and barely able to fulfil their statutory duties.

No incentive

“The core issue facing local authorities is capacity,” says ICAEW Public Sector Audit and Assurance Manager Oliver Simms. “When councils look to make savings as a result of that 29% cut, important back-office functions such as finance teams, governance committees and counter-fraud measures suffer. That’s had real consequences.”

Simms explains: “There used to be a National Fraud Authority with oversight of this area. However, it was abolished, leaving councils to their own devices – with only limited additional funding to tackle fraud locally. There was also little incentive to devote scarce resources to detecting and recovering fraud when the government stood behind the payments even if they shouldn’t have been made.” 

At a broad level, Simms highlights a critical contradiction at the heart of the government’s localism agenda. “Central government reserves the right to set strict conditions for how local authorities spend their money, and rewards funding bids on that basis. But it stops short of setting strict assurance requirements around that finance, in case that’s viewed as a breach of local democracy. I don’t think that’s a sustainable position.” 

False economy

For Simms, though, cuts to finance teams and counter-fraud capability are a false economy that could make it more difficult to deliver the Levelling Up agenda – along with other, vital policy programmes. “The most pressing risk of this dearth of local counter-fraud capacity is long-term delivery,” he says. “Central government is positioning local government as a key partner for rolling out Levelling Up and net-zero initiatives. But if authorities are consistently losing money to fraud, those schemes won’t achieve their objectives.”

With that in mind, Simms says a better financial reporting system for local authorities is needed. “Their accounts are largely impenetrable,” he says. “We need a proper funding mechanism for local counter-fraud measures, because – in efforts to make up for funding shortfalls – councils have been entering into business investments that have left them exposed to further risks.”

“There are some positive signs that the government understands that local governance needs to be improved, with legislation planned to strengthen local authority audit committees for example. But more needs to be done, with a pressing need for a counter-fraud authority that is specially dedicated to supporting local councils to tackle fraud more effectively,” Simms adds.

• For more information, visit ICAEW’s dedicated Fraud hub

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