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The cost of fraud

What respondents were asked to report

Quantifying the cost of fraud against the Commonwealth raises a number of methodological challenges (Smith et al 2014). These include:

  • the difficulties of defining the scope of fraud;
  • determining whether to record the cost of suspected incidents as initially detected or those that have been substantiated in court;
  • deciding whether to inflate the estimate to account for undetected and unreported incidents;
  • deducting amounts recovered (sometimes long after investigations have been conducted);
  • determining whether indirect costs associated with detection, investigation, prosecution and prevention should be included;
  • accounting for indirect costs that entities suffer as a result of fraud, such as the dismissal and recruitment of staff, changing fraud control procedures and undertaking communication activities; and
  • measuring intangible costs including reputational damage for the Commonwealth and the impact of undermining the financial stability of government (see Mayhew 2003).

Many of these costs are currently difficult to quantify in the absence of further research. In addition, a number of entities failed to participate in the census. Each year, on average, 18 percent of those invited to participate failed to do so and arguably, some of those would have experienced either internal or external fraud, the costs of which are excluded from reported figures.

Despite these issues, in order to provide a general indication of gross costs of fraud detected by Commonwealth entities, a number of approaches were adopted. Respondents were, at the outset, asked to indicate the total number of fraud incidents that had been identified or that the entity was informed of, how many persons were alleged to have committed the frauds and what financial losses were suffered as a result. Losses were defined as funds thought to have been lost by the entity prior to the recovery of any funds and excluding the costs of investigation or prosecution. Thus, respondents were asked to report the dollar value of suspected fraud, rather than fraud that had been substantiated following investigation or judicial proceedings. The results presented below, may therefore underestimate the actual losses if the scope of fraud is found to be more extensive after investigation, or overestimate the loss where fraud is not proved, or its extent less than originally reported.

Respondents were also asked to indicate any amounts recovered using criminal or civil proceedings or other administrative methods of recovery. This excluded money that was recovered by the Commonwealth that was not returned to the entity in question such as fines or the proceeds of confiscation orders that remain in consolidated revenue.

The results presented below examine the value of fraud in terms of incidents that solely involved internal fraud, incidents that solely involved external fraud, incidents that involved both types and any other incidents that could not be classified in this way. Further analyses examined the fraud costs for various focus categories described above.

Value by location category

Between 2010–11 and 2012–13, there was a 73 percent increase in the value of fraud, with a total value over the three years of approximately $531m (see Table 8). Not all entities were however able to quantify the value of the fraud incidents they experienced. Indeed, in 2010–11, 12 out of 61 entities (20%) that experienced an incident of any type of fraud were unable to quantify a value. This compared with 23 out of 67 (34%) in 2011–12 and 13 out of 64 (20%) in 2012–13. Although it might be possible to inflate the reported values to account for the incidents that were unable to be costed, caution would be needed in ascribing a multiplier without undertaking further research to assess whether values were not reported because they had not yet been determined, or for other reasons. Similarly, it could be possible to inflate the costs reported to account for undetected fraud, or fraud not officially reported. Owing to the absence of baseline detection information, such an estimation has not been undertaken here. For present purposes, only the above raw data are presented.

Table 8 Dollar value of suspected fraud incidents by location, 2010–11 to 2012–13 ($)
Year Internal fraud External fraud Collusion Unclassified Total
2010–11 2,998,810 116,148,022 0 2,100 119,148,932
2011–12 2,690,087 201,724,438 2,200 8,750 204,425,475
2012–13 3,426,546 203,270,364 402,764 3,031 207,102,705
Total 9,115,443 521,142,824 404,964 13,881 530,677,112

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Over the three years, the reported value of internal fraud incidents increased by 14 percent, while the reported value of external fraud increased by 75 percent. These increases are due not only to changes in the value of individual incidents, but also changes in the number of incidents of each type that were detected during the years in question.

Value by focus category

Figures 14 and 15 present data on the reported value of internal and external fraud, respectively, in terms of the proportion of entities experiencing such incidents and the focus of incidents. The value largely followed the distribution of entities’ experience of fraud types, with the highest values involving fraud relating to obtaining financial benefits—both for internal as well as external fraud. For the purposes of this analysis, incidents involving collusion were merged with the reported incidents of internal fraud. The value of internal fraud incidents was, however, much smaller than external fraud incidents overall, as well as with respect to the various types of focus examined for internal and external fraud incidents.

Figure 14 Internal fraud focus categories by dollar value and percentage of entities affected, 2010–11 to 2012–13

mr24_figure14.ai

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Figure 15 External fraud focus categories by dollar value and percentage of entities affected, 2010–11 to 2012–13

mr24_figure15.ai

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Recovered funds

Respondents were asked to indicate the whole dollar amount that had been recovered in each financial year using various methods of recovery. This excluded money that was recovered by the Commonwealth that was not returned to the entity in question, such as fines or the proceeds of confiscation orders that remain in consolidated revenue. The amount recovered did not necessarily relate to the value of fraud detected in the same year as recovery of funds could have related to incidents committed or detected in previous financial years. Accordingly, it was not possible to indicate the net actual losses suffered in each year. The categories of how money was recovered included criminal prosecution, civil remedies, administrative remedies or by ‘other’ means of recovery. For the three years, $3m in total was recovered in respect of internal fraud and $53m in respect of external fraud, totalling $56m for the three years.

Amounts recovered by focus category

Table 9 shows the reported fraud value for each of the three years for each internal fraud focus category and also the amounts recovered during the year in question. The highest internal fraud values and the largest recovery amounts were in respect of financial benefit fraud followed by entitlement fraud. Between 2011–12 and 2012–13, there was a general decline in amounts recovered in all focus categories (see Figure 16).

Table 9 Internal fraud focus categories by dollar value and amounts recovered, 2010–11 to 2012–13 ($)
Fraud focus 2010–11 2011–12 2012–13
Dollar value Recovered amount Dollar value Recovered amount Dollar value Recovered amount
Equipment 266,524 30,154 236,385 11,807 155,384 10,594
Entitlements 750,645 315,897 825,098 432,547 780,008 418,836
Information 7,715 0 2,012 40,665 21,000 0
Financial benefits 1,832,800 488,639 2,077,427 530,322 2,008,764 360,780
Collusion 0 0 600 0 0 0
Other fraud 127,226 17,279 38,179 85,537 817,484 3,817

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Figure 16 Internal fraud focus categories by dollar value and amounts recovered, 2010–11 to 2012–13 ($)

mr24_figure16.ai

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Table 10 shows the reported fraud value for each of the three years for each external fraud focus category and also the amounts recovered during the year in question. The highest external fraud values and the largest recovery amounts were in respect of financial benefit fraud and entitlement fraud. Over the three years, there has been a fluctuation in amounts recovered in all focus categories.

Table 10 External fraud focus categories by dollar value and amounts recovered, 2010–11 to 2012–13 ($)
Fraud focus 2010–11 2011–12 2012–13
Dollar value Recovered amount Dollar value Recovered amount Dollar value Recovered amount
Equipment 233,546 38,688 54,255 398,182 47,645 15,075
Entitlements 80,467,412 12,710,681 46,441,130 3,216,566 41,224,059 4,663,245
Information 6,326 0 0 5,081 731,027 10,377
Financial benefits 33,937,791 2,841,569 153,059,715 361,983 161,143,720 4,097,807
Other fraud 1,240,394 19,337,999 1,246,439 4,977,873 124,742 356,110

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Amounts recovered by method of recovery

Fraud losses are able to be recovered by Commonwealth entities in a variety of ways, including through the use of orders made during criminal proceedings, civil legal recovery, recovery using a variety of administrative means and other types. Respondents were asked to indicate amounts recovered during each financial year (regardless of when the fraud actually occurred or was detected) for each fraud focus category. These related both to suspected internal as well as external fraud. As is evident in Table 11, the largest amounts were recovered using administrative and other procedures. This was due to the extensive use of such avenues of recovery in connection with revenue and welfare fraud. In some years, criminal proceedings led to recoveries, although civil action rarely led to entities receiving compensation payments. Amounts recovered were proportionally higher in respect of external fraud rather than internal fraud, as would be expected in view of the much higher fraud losses associated with external fraud.

Table 11 Monies recovered in 2010–11 to 2012–13 by method of recovery and focus category ($)
Fraud focus Criminal Civil Administrative remedy Other Total
Equipment 1,907 0 470,192 32,401 504,500
Entitlements 605,546  0 14,159,141 6,993,085 21,757,772
Information 15,458 0 0 40,665 56,123
Financial benefits 3,850,257 352,468 25,739,400 1,108,937 31,051,062
Other 21,926,689 0 652,289 2,199,637 24,778,615

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]

Over the three years, the recovery of funds in conjunction with criminal proceedings has fluctuated greatly in terms of the focus of fraud incidents, with criminal recoveries decreasing greatly with respect to entitlement fraud incidents and other fraud foci, while criminal recoveries with respect to financial benefit incidents increased substantially. These changes are largely due to criminal proceedings being taken in relation to relatively small numbers of high-value incidents.

Table 12 Monies recovered using criminal action by focus category by year recovered ($)
Fraud focus 2010–11 2011–12 2012–13 Total
Equipment 0 1,907 0 1,907
Entitlements 547,076 47,645 10,825 605,546
Information 0 5,081 10,377 15,458
Financial benefits 19,411 188,174 3,642,672 3,850,257
Other 17,028,526 4,894,363 3,800 21,926,689

Source: Commonwealth fraud surveys 2010–11, 2011–12 and 2012–13 [AIC computer file]