Companies are losing an average of 7% of their annual expenditure to fraud, which is now costing the UK £110bn a year, while the global cost has topped £3 trillion, according to research from Crowe Clark Whitehill, together with the University of Portsmouth’s Centre for Counter Fraud Studies (CCFS)
The Financial Cost of Fraud 2018 report considers and analyses 633 exercises which have been undertaken around the world during the last 20 years, to accurately measure the financial cost resulting from fraud and error.
These assessed 40 different types of expenditure with a total value of £15.59 trillion in 49 organisations from 10 countries. The losses referred to are a percentage loss of expenditure.
The range of percentage losses across all the exercises reviewed between 1997 and 2017 was found to be between 0.02% and 27.15%, with average losses of 5.95% (66.3% of the exercises showed loss figures of more than 3%).
Since 2008, there has been a 49.5% increase in average losses, with businesses in the period 2016 to 2017 losing an average of 6.8% of total expenditure, compared to 4.5% during the downturn.
This finding runs counter to some previous evidence that certain frauds increase during recessions and plateau or decrease slightly during periods of economic growth. The researchers suggest it may be that longer term social and technological factors are an underlying cause of the growth of fraud, in addition to the effect of the economic cycle.
Such factors might include greater individualisation (with less adherence to collective moral and ethical ‘norms’); greater complexity of processes and systems making it easier to disguise fraud; more transactions being undertaken by computer and fewer face-to-face transactions (fraudsters feeling more distant from the victims of their dishonesty and thus less concerned about any response); and the increasing pace of change in business (with controls struggling to keep up).
The research suggests the UK economy could be boosted by £44bn annually if organisations step up efforts to tackle fraud and error, while globally, fraud is costing £3.24 trillion each year, a sum equal to the combined GDP of the UK and Italy.
Jim Gee, head of forensic and counter fraud at Crowe Clark Whitehill, said: ‘The bad news is that digitalisation of information storage, and process complexity, coupled with the pace of business change, have created an environment where fraud has thrived, grown and continued to mutate.
‘The better news is that there are examples where organisations have measured and minimised fraud like any other business cost and greatly strengthened their finances.
‘In the current climate, to not consider the financial benefits of making relatively painless reductions in losses to fraud and error is foolhardy. The message to all organisations is measure, mitigate and manage fraud, or your bottom line will continue to suffer.’
The research suggests that where losses have been measured, and the organisations concerned have accurate information about their nature and extent, there are instances, especially in the UK and US, where losses have been substantially reduced.
They include a major mining company which reduced losses across its procurement expenditure by over 51% over a two year period, while the US Department for Veterans Affairs cut its losses across a $4bn program by more than 46% in 2010 and 2011.
The Financial Cost of Fraud 2018 is here.
Report by Pat Sweet