Countering Private Sector Fraud and Corruption

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‘It is not possible to measure both fraud and corruption accurately in the private sector except at great expense, which is simply not economical.’ Critically evaluate this statement.

This question requires the term ‘fraud and corruption within the private sector’ to be defined and also discuss how they are measured to a degree of accuracy. Fraud and corruption co-exist with similar characteristics like covert nature, being difficult to detect and benefitting a few causing damage. What is fraud? Prior to the Fraud Act 2006 which came into force on 15 January 2007, it was difficult to define fraud because of the variation of both legal and analytical/survey definitions. The National Economic research Associates (NERA) in 2000 defined fraud as “the issue of defining which activities constitute fraud is the subject of considerable debate’”. Since the implementation of the legislation fraud is now defined as a statutory offence by which a person is guilty of fraud if they:

  • knowingly make a false representing,
  • or failing to properly disclose information when required,
  • or misusing a position of trust for personal benefit or causing losses to another party. (Office of Public Sector Information,2007).

Fraud in most cases not only affects a private company’s financial results but might also lead to a loss in reputation, shareholder value, customer trust and investor confidence (Zahra, Priem and Rasheed,2005).  In order to make up for the financial loss that affects the company they will usually increase consumer prices which in turn may lead to losses in sales and/or an additional loss in market shares. Fraud and corruption in the private sector is sometimes referred to as ‘occupational fraud and abuse’ and may be understood as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organisation’s resources or assets” (Association of Certified Fraud Examiners (ACFE) 2008, p.6). Fraud was also defined by Cromer (2003:4) as ‘any dishonestly through which one person intends to gain an advantage over another’. Cromer (2003:4) also defines corruption as ‘corruption is the payment or receipt of unauthorised benefit … for doing or not doing anything…’. “Like fraud, corruption relates to the abuse or misuse of a ‘normal’ relationship, whether genuine or contrived, by either or both parties… both are seen as economic or financial crimes and, as such, are investigated by fraud squads…” Diog (2006:116-117). Corruption is also described as ‘…the abuse of entrusted power for private gain’ (Transparency International,2010). The term private sector refers to all businesses and organisations that are owned and managed by any non-governmental functions, i.e. individuals, private companies, foundations. It is not uncommon for fraud and corruption to occur within both the private and public sectors the only difference is the types of fraud and victims. This has determined the different approaches, tools and measurements required to adequately address the problem.

The issues raised by the fraud and corruption practises within the private sector have rarely been highlighted as a topic of interest to the general public domain. This has however changed because some of the huge financial losses that have occurred within some companies have become a matter of interest for the media and the public. Another serious issue is that most fraud cases have gone undetected and even if they have been detected they have not been reported. Some victims do not even realise that they have been defrauded (Smith et al.,2011). It was established that the victim would often report that they had been a victim of a fraud and also the organisation or individual(s) who were responsible for the compensating of fraud would also report the matter, (Levi, Burrows, Fleming and Hopkins,2007).

It has been noted by the author that there is a common theme that is affecting the jurisdictional arena. This has been highlighted because there are different considerations with some people reporting losses in ‘England and Wales’ and others for ‘UK’, (Levi et al.,2007). Jurisdiction and definition issues combine to give disparity in measurements affecting other countries like America and Australia that have different laws in different states, (Smith et al.,2011). With all these measurement can be seen to be near impossible or to only come at great expense.

The major concern within the private sector is the recording of the statistics and recorded fraud and corruption reports. Therefore this has prevented an accurate statistical report from being compiled that would produce a complete set of guidelines for private sector organisations to follow in the aid of fraud and corruption. Also is has been noted that within the UK there are currently no single or complete fraud statistics available. There are however various reports commissioned by various government bodies, industry organisations or private sector consulting firms that have produced reports using only the evidence and data that has been gathered then produced their findings utilising various different criteria.  Senior (2004:22) tried to define this issue by stating ‘ … if we are all against corruption [fraud] but cannot be sure how to define it, we cannot even start to analyse its effects let alone try to do something about it’, Senior (2004:22). This then asks how we can accurately measure what we cannot identify. Prior to 2006 there was not a clear and unambiguous definition of fraud within the UK until the Fraud Act 2006 was introduced (Smith, Button, Johnston and Frimpong,2011). Another problem prior to the implementation of the legislation was the inaccuracy of measurements against fraud available within the private sector.

To measure fraud and corruption accurately within the private sector it is apparent that there are many various examples of statistics available from many different organisations and that they all have their own methodologies. In 2000 NERA made an initial attempt to produce an accurate report of fraud and stated that discovered and undiscovered fraud could range from £5 billion-£9 billion; costs associated with prevention, detection, investigation and prosecution for private sector organisations was £114 million, (Doig,2006). It valued cases handled by police fraud squads at between £3-4 billion spread over 2,000 cases investigated by 700-800 officers, leaving a need to ensure comprehensive overview, (Doig,2006). Once the NERA report was published other organisations tried to follow their examples ensuring that they learned from NERA’s mistakes with a holistic approach.

An important weapon to combat fraud and corruption was the introduction of the Serious Fraud Office (SFO). The SFO’s principle aim was to protect society from major fraud and corruption involving amounts of more than £1 million. In 2006 the SFO published reports that stated it started with 68 active cases involving an estimated £2.06 billion, (Levi et al.,2007). The Association for Payment Clearing Services (APACS) estimated total cost of fraud from members in 2008 at £609 million, a rise from £535 million in 2007, (APACS, 2009). The above figures from the SFO have one major flaw because all the records held by SFO only record frauds over a certain amount which is set as £1,000,000.  The SFO is considered to operate on a reactive approach and not a preventive body hence the zero costs on prevention. However its resources published in 2005–2006 highlighted a cost up to £41 million which also extended a further cost because the figure did not include the costs that would be incurred by the police and other investors working with them, (Levi et al.,2007).  The issue with the figures supplied and published by APACS is only based upon the statistics from members within their ranks so it therefore does not reflect a concise picture of the full economy and situation, (Levi et al., 2007). From the above figures it can be seen that the two reports are a not cost effective and uneconomical considering that neither of them reflect a true picture.

Other facts available to provide facts relating to fraud are based upon surveys.

British Retail Consortium who are included within the private sector organisations carried out surveys of its members on an annually basis to review cost of crime including fraud. This found that in 2004-2005 the cost burdened upon retailers reached £68.1 million, (Levi et al.,2007). In the UK the Office of Fair Trading (2006 as used in Smith et al.,2011) estimated that 48 per cent of the population have been targeted by scam and that 8 per cent would admit to having been a victim of one. Surveys are however limited by the fact that some information are largely based on victims’ opinions or ‘guesstimates’ which while useful are not good measures as administrative data and surveys are not done regularly, (Levi et al.,2007).

It has been noted that there are errors in the measurements that are provided by the service providers who have conducted surveys but in their misjudgement they have only concentrated on the larger corporations and as such they do not represent the broader private sector (Smith et al.2011). It has also been discovered that currently there is no data available on the prevention or anticipated costs as a result of fraud (Levi et al.2007). Levi (1987) stated that in all the estimates made to measure the cost of fraud, the impact of inflation upon estimates of cost derived from studies in earlier period should be borne in mind. ‘… attempts to assess the true cost of fraud will continue to be hindered by various reporting sources and criteria they use’ Doig, (2006:47).

To comprehend cost efficiency in relation to measuring fraud it is first necessary to measure fraud as the first step to try and combat it from occurring. Levi (1987:21) stated “ … it is an important starting-point for social policy to comprehend the effects of fraud upon the social fabric … ‘How much of a problem is fraud?’ must be addressed partially through data on its cost”. Also there is a need to utilise data highlighting what trends are being displayed in relation to fraud. Smith et al (2011:40) ‘there are challenges but greater accuracy on trends is possible’. An area that the National Fraud Authority specialises in is to identify more accurate fraud measurements. During its Annual Indicator 2011 publication of fraud loss its estimated calculations were produced with ease of calculations for the readers by rounding up the figures to the nearest £100 million or £1 billion and also utilised the ‘victim-centric’ approach to avoid double counting. During the period of 2009 – 2011 a streamlined, cost-effective and accurate method of measurement was introduced by Gee, Button and Brooks.

It can be viewed that fraud and corruption measurements are far ranging and are not constructed or implemented universally within either the various sectors or organisations. To introduce universal measurements would require all organisations to trade or record all details in the same format and this could require a change in business tactics. It has also been established that the amount of revenue that has been lost due to misrepresentation or opportunities available to conduct fraud or corruption as at times been over looked because small amounts are not as noticeable as larger amounts however the smaller amounts can and will add up to a greater value.  A suitable parting note is that ‘in a troubled economic climate, not to consider the financial benefits of making relatively painless reductions in losses to fraud and error seems rather foolhardy’ Gee, Button and Brooks, (2009:12).


References

Bolton, R.J. and Hand D.J. (2002) Statistical Fraud Detection: A Review. Statistical Science (2002) Vol. 17 235-255.

Brooks, G., Button, M. and Gee, J. (2011) The Scale of Health-care Fraud: A Global Evaluation. Security Journal Vol. 25, 76-87.

Comer, M.J. (2003) Investigating Corporate Fraud. Aldershot: Gower.

Doig, A. (2006) Fraud. Cullompton: Willan.

Ernst & Young. (2003) Fraud: The Unmanaged Risk, 8th Global Survey. Ernst and Young.

Gee, J., Button, M., and Brooks, G., (2009) The financial cost of fraud. Working Paper. MacIntyre Hudson, Milton Keynes.

Levi, M. (1987) Regulating Fraud: White-collar Crime and the Criminal Process. London: Tavistock.

Levi, M., Burrow, J., Fleming, H. and Hopkins, M. (2007) The Nature, Extent and Economic Impact of Fraud in the UK. London: Economic Crime Portfolio.

National Fraud Authority (2011) Annual Fraud Indicator. Available from: http://www.homeoffice.gov.uk/publications.

Smith, G., Button, M., Johnston, L. and Frimpong, K. (2011) Studying Fraud as White Collar Crime. Basingstoke: Palgrave.

Senior, I. (2004) Corruption, The Government and the Private Sector: Why It Matters And What Can Be Done. Institute of Economic Affairs (2004) 22-29. Oxford: Blackwell.

http://www.abi.org.uk/Media/Releases/2011/07/No_hiding_place_for_cheats_as_drive_to_reduce_insurance_fraud_moves_up_a_gear.aspx.

http://www.legislation.gov.uk/ukpga/2006/35/crossheading/fraud.


Copyright | © 2017 Stephen Langley

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.


About the Author

Stephen Langley is an accomplished Senior Security Professional and Brand Protection Manager, who has expertise in compliance related investigations. Stephen holds a degree in UK Law (LLB) that he attained from the Open University and a MSc in Security Management that he obtained from the University of Portsmouth and also various Leadership and Management qualifications.


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Other Publications from Stephen

Langley S. (2016). ‘Insider Threat’ in M. Petrigh (ed.) Security and Risk Management: Critical Reflections and International Perspectives, Volume 1 (pp. 37-68). London: Centre for Security Failures Studies Publishing


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