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Cost of fraud

The UK is losing some £85.3 billion to fraud every year. That is according to the latest “Financial Cost of Fraud Report 2013” from BDO LLP, the accountancy and business advisory firm.

The report, based on 15 years of data, finds that average losses, based on total expenditure, for the period between 1997 and 2007 were 4.57 per cent. However, taking account of data from the five years since the start of the recession in 2008, this figure has risen by almost a fifth to 5.47pc. In terms of UK GDP, this implies a total loss to fraud of £85.3bn and on a global basis, a total loss of £2.91 trillion.

The increase in losses reflects a common picture found in previous recessions, the firm suggests. Between 1980-1981, UK GDP shrank by 6.1pc and reported fraud and forgery rose by 9.1pc; between 1990-1991 UK GDP shrank by 2.5% and reported fraud and forgery rose by 30.5pc.

The good news is that the report quotes examples of where this cost has been reduced by up to 40pc within 12 months through initiatives designed to pre-empt fraud. These have included development of anti-fraud cultures, meaningful deterrents and the revision of processes that remove system weaknesses which provide opportunity for fraud. A 40pc cut in the UK losses to fraud would represent around £34bn which is the equivalent of the UK Government’s 2012 budget for education. Examples include:

The UK’s NHS where losses were reduced by up to 40 per cent within 12 months and up to 60pc over a longer period[1];
The UK’s Department of Work and Pensions achieved a significant reduction of more than 24pc[2] in losses in respect of Job Seekers Allowance.
The US Department for Veterans Affairs successfully reduced its losses across a $4 billion programme by more than 46pc [3];
The US Department of Agriculture successfully reduced its losses across an $8 billion programme by more than 22 pc [4].

What they say

Jim Gee, Director of Counter Fraud Services, BDO LLP said: “Fraud remains a challenging and expensive problem, and its economic effects are clear – affected public services, less financially stable and profitable companies, reduced job security and lower disposable incomes for us all. The financial crisis, where fraud has risen significantly, has clearly provided the ideal conditions in which fraud can grow.

“Assessing the true cost of fraud, as opposed to the cost of reported fraud, presents some very scary numbers. Putting in place pre-emptive measures could make very significant improvements to the financial health and stability of UK plc.

And Professor Mark Button, Director of the Centre for Counter Fraud Studies and co-author of the report, said: ”A key first step in solving this problem of fraud is to understand the nature and scale of it. This report shows its true scale, both in the UK and globally. Research has an important part to play in this and we are pleased to match BDO’s practical experience with our world leading database and academic rigour.”

[1] NHS – 1998 to 2006

[2] Department of Work and Pensions – Fraud and Error in the Benefit System – 2011/2012 Estimates (Revised Edition)

[3] Department for Veterans Affairs – Performance and Accountability Report 2012

[4] Department of Agriculture – Performance and Accountability Report 2011

About the report

The Financial Cost of Fraud Report 2013 is based on global research across nearly 300 successful fraud loss measurement exercises covering some 40 types of expenditure in various different countries with a total value of £7.22 trillion (equivalent to three times the value of UK GDP) or $11.22 trillion (equivalent to one seventh of global GDP). The accountancy firm says that the data is derived from accurate, statistically valid exercises and relates to the total cost of fraud, not just what has been detected or reported, which greatly undervalues its true cost.

The report builds on research first undertaken and published in 2009, and repeated in 2011, collating information from around the world about the real financial cost of fraud and error (as opposed to the cost of detected or reported fraud). It represents another output of the collaboration between BDO LLP, and the Centre for Counter Fraud Studies at the University of Portsmouth (CCFS), a fraud research centre.


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