Supporting Older

People Conference

B12: May the anti-fraud be with you

Speakers: Jim Gee

Director of Counter Fraud Services PKF Accountants and Business Advisors

Stuart Gambling

Director of Audit and Risk Management Riverside Group

Chair: Kelsey Walker

Strategic Regulation Manager Homes and Communities Agency

www.pkf.com

Maximising fraud resilience,

minimising the cost of fraud

Jim Gee

Director of Counter Fraud Services, PKF (UK) LLP

Chair of the Centre for Counter Fraud Studies,

University of Portsmouth, UK

Presentation to the

National Housing Federation

Finance Conference

20th March 2013

www.pkf.com

Background : Jim Gee

• 28 years a Counter Fraud Specialist

• Head of Counter Fraud team at three local authorities

• Advisor to UK Parliamentary Select Committee

• Chief Executive of the UK NHS Counter Fraud Service

• Senior civil servant and lead advisor to the UK Attorney-

General, 3 Secretaries of State and 5 Ministers

• Director of Counter Fraud Services at PKF and Chair of

the Centre for Counter Fraud Studies at University of

Portsmouth

• Recently advised the Chinese Government on fraud and

has worked with organisations in more than 35 countries,

most recently Zambia, Indonesia and South Africa

www.pkf.com

What will be covered

• Background

• What is fraud?

• Why is fraud important?

• A new approach : focussing on fraud as a business cost

like any other

• Two key questions to be answered:

1. What is the cost of fraud?

2. How well protected is my organisation?

• How quickly can the cost of fraud be reduced?

• The importance of fraud resilience

www.pkf.com

Let’s be clear …

NOT

• Corruption or bribery

• Money laundering

• Error or incompetence

What is fraud?

NOT just a criminal matter

• Civil law

• Criminal law

• Regulatory sanctions

• Disciplinary sanctions 0.4% of fraud is

successfully prosecuted

www.pkf.com

Why is fraud important?

• It is not a victimless crime

• It can undermine the financial health and reputation of

housing providers

• It diverts resources from the provision of quality social

housing

• Its impact is

Individual Organisational

Economic Financial

www.pkf.com

The economic impact

• A recession “fuelled by an epidemic of mortgage fraud” ...

Phil Angelides, Chair of the U.S. Congress Financial

Crisis Inquiry Commission

And how the recession impacted on fraud ...

• an increase of 55% in online banking fraud

• insurance fraud rose by 24% to £1.9 billion

• identity fraud rose 74% in the first half of 2009

• a 72% increase in the number of directors disqualified for

financial crime

• an increase of 72% in the number of reported frauds

• The Bank of England has revised its estimate of the

percentage of counterfeit £1 coins from 2 to 2.5%

www.pkf.com

The economic impact

What you would expect in a recession:

• 1980 - 1981

– GDP shrank by a total of 6.1%

– Reported fraud and forgery offences increased by

9.09%

• 1990 - 1991

– GDP shrank by a total of 2.5%

– Reported fraud and forgery offences increased by

30.52%

• 2008 - 2009

– GDP has shrunk by 6%

– Fraud and forgery up by more than 40%?

www.pkf.com

A new approach

‘OLD STYLE’ APPROACH

– ‘Pay and chase’

– ‘Pick & choose’

– Considered enough to merely do something - anything!

– Focused on activities (e.g. investigations)

– Perceptions based on anecdotal information or cases which have come to light

– Cannot quantify effects or track benefits to the organisation

MODERN APPROACH

– Proactive and comprehensive

– Identifies and applies exactly the right solution

– Focused on outcomes (e.g. reduced losses)

– Statistically sound and legally founded method of measuring fraud

– Seeks to pre-empt fraud not just react to it

– Quantifies the reduction in

fraud losses and tracks

tangible financial benefits

www.pkf.com

Treating fraud as a business cost

The last 15 years

• DWP from 1996; in the UK NHS from 1998

• US Improper Payments Information Act 2002 and 2010

• European Fraud and Corruption Declaration 2005

• The UK Government Fraud Review 2006

• ‘The Financial Cost of Fraud’ Reports 2009 and 2011

• NFA Annual Fraud Indicator 2010 - 2012

www.pkf.com

UK Government: What does fraud cost?

www.pkf.com

UK Government: What does fraud cost?

National Fraud Authority

2012

£1.76 billion lost to tenancy

fraud

www.pkf.com

UK research: What does fraud cost?

• Most fraud is undetected

• The greatest fraud cost comes from high volume / low value

fraud

• Instances of high value fraud which appear in the media are

reported precisely because they are unusual

• Low value fraud individually appears to be unimportant and

unworthy of a substantial response

• Fraud can be measured accurately

www.pkf.com

Global research: What does fraud cost?

• Where has fraud been accurately

measured?

• Excluding any figures based on

detected or reported fraud or

‘guesstimates’ or surveys of

opinion

• Statistically valid estimates : 90 – 95% statistical confidence

• Accurate : between plus or minus 1 – 2.5%

• Externally validated

• A dataset covering 203 loss

analysis exercises,45

organisations, 9 countries, 32

types of expenditure with a value

of over £5 trillion

‘The Financial Cost of

Fraud’ Report 2011’

www.pkf.com

What the data shows

0.12%

5.70%

10.60%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

LOWEST PERCENTAGELOSS

AVERAGE PERCENTAGELOST

HIGHEST PERCENTAGELOSS

www.pkf.com

What the data shows

30.28%

44.04%

25.69%

PERCENTAGE LOSS < 3%

PERCENTAGE LOSS 3-8%

PERCENTAGE LOSS > 8%

PROPORTIONS OF DIFFERENT

LEVELS OF LOSS

www.pkf.com

What the data shows

4.57%

6.10%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

AVERAGE PERCENTAGE LOST - BEFORETHE RECESSION

AVERAGE PERCENTAGE LOST - AFTERTHE RECESSION

AN INCREASE OF 34%

www.pkf.com

How well protected is my organisation?

• Fraud resilience is an accepted

measure of protection

• Rooted in the CIPFA ‘Managing the

Risk of Fraud’ standards

• Developed by PKF and the Centre

for Counter Fraud Studies at

University of Portsmouth since

2007

• 29 different factors

• A maximum rating of 50 points

• Applied to organisations

representing more than 1/5th of UK

GDP

• The subject of research in many

sectors including social housing

2011 Social Housing

Report

www.pkf.com

How well protected is my organisation?

Overall findings:

• Across the sector a mean

rating of 32.3 / 50

• Public sector: 34.4

• Private sector: 30.6

• Charitable sector: 24.2

2011 Social Housing

Report

www.pkf.com

How well protected is my organisation?

Social housing sector best:

• Prompt reporting of fraud

(100%)

• Identifying policy and systems

weaknesses (98%)

• Powers for investigators (95%)

• Guidance for investigations

(94%)

• Design fraud out of processes

(92%)

2011 Social Housing

Report

www.pkf.com

How well protected is my organisation?

Social housing sector worst:

• Basing counter fraud

investment on information

about the cost (16%)

• Reviewing the effectiveness of

the work (23%)

• Professional training for

counter fraud staff (29%)

• Reviewing the development of

the anti-fraud culture (29%)

• Less than 40% use data

analytics

2011 Social Housing

Report

www.pkf.com

A new Guide to Social Housing Fraud

• In July the National Housing Federation commissioned PKF to

develop a new Guide to Social Housing Fraud to help social

housing organisations improve their resilience to fraud

• Practical advice on tackling fraud across the whole area:

– How to assess its nature and cost

– How to design an appropriate strategy

– Creating and resourcing an effective structure

– Taking a range of pre-emptive and reactive actions

– Performance managing the work and delivering real benefits

• Published last December

• We have also made available a free Self-Assessment Fraud

Resilience tool (SAFR)

www.pkf.com

Fraud resilience is central to costs

• The tool is based on the largest fraud resilience database in

the world which now has data covering 29 factors concerning

almost 700 organisations and more than 80 social housing

organisations

• Our work shows that what impacts most on the cost of fraud is

fraud resilience not the speed of response after it has

happened and losses have been incurred

www.pkf.com

Fraud resilience is central to costs

AVERAGE LOSS AVERAGE RESILIENCE

We have data concerning

the fraud resilience of

almost 700

organisations.

We have data concerning

more than 200 fraud loss

measurement exercises

involving 32 types of

expenditure with a total

value of over

£5 trillion.

• The most resilient losing 1.5% of expenditure or less

• The least resilient losing 10% of expenditure or more

www.pkf.com

A helicopter view of your organisation

www.pkfapps.co.uk/socialhousingfraud

www.pkf.com

www.pkf.com

Conclusions

• Fraud can be measured as a cost like any other – as can

fraud resilience

• More and more organisations recognise the value of

doing this

• The data shows that fraud losses are significant – AND

RISING

• The link between fraud resilience and fraud losses is very

clear – and can be calibrated

• Research shows that the cost of fraud can be reduced by

up to 40% within 12 months

• The power of knowledge – specialist skills and academic

rigour brought together – can help

www.pkf.com

Contacts

Jim Gee Hamid Ghafoor

Director of Counter Fraud Services Partner

DDI: 020 7065 0557 DDI: 0151 237 4481

Email: jim.gee@uk.pkf.com Email: hamid.ghafoor@uk.pkf.com

Martin Moore Nicola Higginbottom

Senior Manager, Counter Fraud Services Senior Manager, Business Risk Services

DDI: 0113 228 4194 DDI: 0161 819 3318

Email: martin.moore@uk.pkf.com Email: nicola.higginbottom@uk.pkf.com

HOUSING FINANCE Conference and Exhibition

20 March 2013

May the Anti-Fraud Be with You

Stuart Gambling

Director of Audit & Risk Management

The Riverside Group

What does a typical fraudster look like ?

Often works in finance

Been here for years

Someone you rely on

Money worries

Lavish lifestyle (sometimes)

References not what they seem

Quite clever

Opportunist

Started small and got greedy

Done it before

Somewhere to run

It’s always the person you least

expect… …but when you join the dots it’s

usually obvious.

About Riverside

Established in 1928

£270m turnover

54,000 properties nationally

£1.7bn asset base

11,500 people provided with

a care or support service

Own a housebuilder - Prospect

In-house maintenance

contractor

Regeneration joint venture

partner

Why take action on fraud ?

Risk to the sector is increasing

Economic conditions getting tougher

Restructuring might mean less staff loyalty

Pressure to cut costs could lead to weaker controls

Local challenges

Some lack of awareness of the risk of fraud

Mixed experiences of criminal and recovery action

Our approach

Understand the exposure to fraud

Enhance the anti-fraud culture

Sharpen up the warning indicators

Ensure controls are resilient

Refresh the investigation procedures

Understand the exposure to fraud

Financial

abuse of

vulnerable

residents

Theft of

information

Supplier

kickbacks Job building

BACS payment

file

interception or

alteration

Supplier bank

details

Low level

fraud eg cash,

overtime,

expenses

Dummy

employee

Theft of

materials

Misuse of

electronic

banking

systems

Development

Property sales

KPIs

Contractors

Tenancy fraud

Enhance the anti-fraud culture

We won’t tolerate it

We will find it We will take

action

• Code of conduct

• Fraud policy statement

• Anti-bribery policy

• Business ethics

• Tone at the top

• Fraud risk assessment

• Pre-employment screening

• Staff trained to spot warning flags

• Whistleblowing

• Anti-fraud controls

• Proactive anti-fraud activities

• Fraud specialists

• Fraud response plan

• Skilled investigators

• Pursue criminal and civil action

• Publicise actions against fraudsters

• Board and Audit Committee challenge

Audit Committee role

Killer questions

Is the fraud risk assessment complete ?

How would you commit the perfect fraud here ?

And where would you hide it ?

Are we told about all instances of fraud ?

Why did it take so long for the fraud to be

discovered ?

We know you will prevent the last fraud from

happening again…the next one will be different

Do staff really know about whistleblowing

arrangements ?

What have you done to make staff confident

about using the whistleblowing procedures ?

Staff not taking holidays, lifestyle issues

High staff turnover

Regular grievance and disciplinary cases

Problems uncovered when new staff start

Weak explanations for budget variances

Over-reliance on a single person

Autocratic managers

Unreconciled suspense accounts

Messy supplier accounts

Cosy relationships with contractors

Competing tender prices too close for comfort

Contractors appointed without tender

Large numbers of variation orders

Fraud warning signs

Proactive anti-fraud work

Supplier bank accounts v’s

employee bank accounts

Supplier bank details changed and

then changed back again

VAT number verification

Supplier address v’s employee

address

Unusual supplier addresses eg

residential, PO Boxes

Companies House

Employee Directors (and relatives)

Multiple supplier accounts

Payments just below authorisation

threshold

Inactive accounts with sudden large

payments

High value spend not tendered

Unusual systems access eg failed

attempts, out of hours

Unexpected journals (to hide the

fraud)

Variations

Suppliers Payments

Control resilience

Controls stress tested eg staff absence, activity spikes

Redundant controls eliminated

Fraud risk considered as part of control design

Delegated authorities enforced by technology

Automated alerts and exception reports

Systems access and permissions well controlled

Control design

Controls fully documented

Explicit expectations on staff when they sign-off on a

control (ie what they need to check)

Monthly self-certification that controls are working

Accountability for all parts of the I&E/balance sheet

Accountability

More frequent audits on fundamental controls as well as

the normal cyclical end to end audits

Fraud risk covered in all audits

Proactive identification of emerging fraud risks

Audit

The fraud investigation

Risk of alerting the fraudster

Letting it run might lead to better evidence

Stop the loss

Prove ‘beyond reasonable doubt’

A DIY investigation could affect the reliability of the evidence especially IT records

Criminal action

Prove ‘on the balance of probabilities’

A negotiated settlement will complicate a criminal case

If prosecution is not possible, civil actions can still demonstrate tough action against fraud

Civil recovery

Fraud response plan

Fraud Identified

Incident management

team assembles

Incident plan agreed

Stop further loss and secure

the evidence

Investigation

Asset recovery Criminal and disciplinary sanctions

Notify Board, regulator and

insurer

Lessons learnt

− Appoint a single person to control the investigation.

− Plan in advance how to access data on IT systems.

− Know how to source specialist help. It’s a distress

purchase and clear terms of reference are needed.

− Civil recovery can be expensive. Agree your objectives

upfront and don’t throw good money after bad

− The Police will expect you to investigate yourself.

Provide them with a well organised evidence trail.

− Decide when to approach the fraudster. Too soon and

you may not know the facts. Too late and they may

have gone.

− Plan how to handle the communications. Staff may be

unsettled.

Fraud investigation tips

QUESTIONS

Supporting Older

People Conference

B12: May the anti-fraud be with you

Speakers: Jim Gee

Director of Counter Fraud Services PKF Accountants and Business Advisors

Stuart Gambling

Director of Audit and Risk Management Riverside Group

Chair: Kelsey Walker

Strategic Regulation Manager Homes and Communities Agency