By Maximilian Clarke

Public sector organisations are experiencing increasing levels of economic crime and are particularly at risk from being defrauded by their own employees and their suppliers, according to findings from PwC’s latest Global Economic Crime Survey.

Based on the views of over 180 respondents from public sector organisations in 36 countries, the report says it is not surprising that fraud against the public purse is on the increase, given the onset of public sector cuts in many countries.

According to the survey, the most comprehensive worldwide study of economic crime in the public and private sectors, 46% of respondents from government and public sector organisations experienced one or more incidents of economic crime in the last 12 months. This was up from 37% in 2009 when the survey was last carried out and well above the average of 34% across all sectors.

Almost all types of fraud are on the increase, including the ‘big three’ of asset misappropriation, accounting fraud and bribery and corruption, while cybercrime has also risen sharply up the list. Asset misappropriation is the commonest type of fraud, suffered by 75% of respondents. The collateral damage to an organisation’s reputation and relationships with regulators, suppliers, employees and the public, is significant and was a widely held concern among those polled.

“It seems we are now seeing a pattern of behaviour in the public sector, as cuts and redundancies begin to take hold, similar to the one our survey found in the private sector two years ago,” said Ian Elliott, forensic services partner, PwC. “Then, companies responded to the growing threat by tightening up their controls and investing in fraud prevention techniques. Public sector organisations should now follow suit if they are to prevent the number of accounting frauds and other types of economic crime from increasing in the future.”

Employee fraud
The number of frauds committed by staff has increased significantly; over two-thirds of the economic crimes experienced in the last 12 months have been committed by public sector employees, compared to just over half in 2009. The typical employee fraudster is a 40-plus male, relatively junior but with five years or more service. The survey also showed that public sector employers are less likely to dismiss employees for committing fraudulent acts than in other industries.

“It can be all too easy for an individual to simply transfer departments, leaving them free to commit their crimes over and over again,” continued Elliott. “If public sector organisations are to adopt a zero tolerance approach to economic crime, they need to consider seriously the actions taken against fraudulent behaviour.“

Supplier fraud
Since the 2009 survey there has been a large increase in supplier fraud, accounting for 32% of all frauds committed by external parties, up from 13%. Although the number of frauds committed by customers and agents in the public sector has fallen, it appears that organisations are increasingly at risk from their suppliers. Feedback from PwC’s clients indicates that false invoicing schemes and requests for unauthorised changes of supplier details are on the rise and, most worryingly, these types of crimes can often involve some collusion from within public sector organisations.

One of the reasons for the increase in supplier fraud may be that public sector organisations are continuing to maintain business relationships with third parties that have defrauded them. Only a quarter reported terminating the relationship after the discovery of an incidence of fraud, compared to nearly half in the private sector.

“As the public service market becomes more open in many countries, suppliers more diverse, and more voluntary and private sector organisations become involved in delivering services, procurement departments will also face a whole raft of new challenges to ensure that the quality and cost-efficiency of the services being delivered are not compromised.“

Cybercrime, in previous surveys statistically insignificant, has emerged as a growing threat suffered by 14% of public sector respondents. The survey shows that the public sector is aware of the rising threat, with 28% of respondents thinking that they are likely to suffer a cybercrime attack in the next 12 months and over 40% of respondents saying they perceive the risk of cybercrime to be on the rise.

Andrew Miller, PwC’s head of information security in government, comments:
“Damage to an organisation’s reputation and the potential loss of data are high on the public sector’s agenda when it comes to the impact of cyber attacks. This is hardly surprising given recent high profile cases of data security breaches. Therefore, it is vital that organisations continue to ensure they are investing in cybercrime monitoring capabilities and align their management structures to take timely actions if a cyber incident occurs.”

Although over half of public sector organisations said they have in-house capabilities to detect cybercrime, most don’t have the resources to investigate it and are reliant on external forensic technology investigators. The statistics also indicate that the most senior people within organisations are not placing enough emphasis on the importance of managing the real threats that cybercrime frauds present to their organisation, with nearly half of Boards not reviewing the threat more frequently than annually.

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