National Audit Office report on Tackling fraud and corruption against government

Most public bodies do not know how much fraud they face and cannot demonstrate that they have the correct level of counter-fraud resources, according to the National Audit Office (NAO).

The amount of fraud in government expenditure that was reported in the accounts audited by the NAO rose from £5.5 billion total in the two years before the pandemic (2018-19 and 2019-20) to £21 billion in total in the following two years. Of the £21 billion, £7.3 billion relates to temporary COVID-19 schemes. ¹ These estimates are in addition to an estimated around £10 billion of tax revenue lost to evasion and crime every year.

The Public Sector Fraud Authority (PSFA) - established last year in response to concerns about fraud during the COVID-19 pandemic and the lack of a coordinated response - has a broader estimate that includes both fraud and error but excludes expenditure specific to the COVID-19 pandemic. It estimates that in 2020-21 there was between £33.2 billion and £58.8 billion of fraud and error in government spending and income unrelated to the pandemic.² This is out of £1,106.1 billion of expenditure and £608.8 billion of HMRC tax income.

The vast majority of government's counter-fraud capability sits within the Department for Work & Pensions and HM Revenue & Customs, where the largest known risks exist. However, outside of tax and welfare, most departments have little counter-fraud capability and cannot demonstrate that this is proportionate to the level of fraud they face.

Government's vulnerability to fraud increased due to its response to the pandemic. The NAO found that public bodies could have better managed the fraud risk without impairing their emergency response. These include faster transparency, better management of conflicts of interest, addressing known vulnerabilities more quickly, and timely financial reporting.

The PSFA has assessed government's counter-fraud understanding, resourcing, and the outcomes it achieves from its counter-fraud resources. It found only 14% of the 70 organisations assessed understand and measure the fraud and error risks that they face and just 6% could demonstrate a strong return on their counter-fraud investment. PSFA also found that even without specific measures of fraud and error risk, 27% of the organisations it assessed showed clear signs of a mismatch between their resources and risk.

Government has made some progress since the NAO last reported in 2016.³ It established the Government Counter Fraud Function (to bring together 13,000 people working on counter-fraud activity across the public sector) and the Government Counter Fraud Profession (to support the development of capability for counter-fraud professionals across government) in 2018 and the PSFA in 2022,  to act as government's centre of expertise for the management of public sector fraud and associated error against the public sector.

The NAO concludes that the creation of the PSFA presents an opportunity for a renewed focus on fraud and corruption, but that it will need to be influential across government to achieve the required changes in culture, preventative approach, and robust assessment of risks.

The NAO has set out nine insights on measures the PSFA can take to help government reduce the extent of fraud and corruption⁴. Departments need to work together to fight fraud; demonstrating best practice controls and transparency; set a counter-fraud culture; adopt prevention techniques; and use investigative powers as a deterrent.

The PSFA can also help departments by developing a better methodology to assess and measure fraud; developing the counter-fraud profession; helping departments harness and use data to prevent fraud and corruption; and by bringing counter-fraud expertise into the design of new programmes and systems.

Gareth Davies, the head of the NAO said: 

"There has been a substantial increase in the level of fraud reported in the annual reports and accounts we audit. In addition to the loss of taxpayer money, it creates the risk that people come to perceive fraud and corruption across government as normal and tolerated. If not tackled, this could affect public confidence in the integrity of public services. 

"Government has more to do to understand the scale of the problem it faces and cannot yet demonstrate that it is tackling fraud effectively. The creation of the Public Sector Fraud Authority creates a real opportunity to address this."