Uncovering the Hidden Cost of Staff Fraud: An Assessment of 45 Cases in the UK
Mark Button
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK.
Dean Blackbourn
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK.
Chris Lewis
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK.
David Shepherd
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK.
Abstract
Purpose The purpose of this paper is to provide evidence on the additional costs of dealing with staff fraud, beyond the initial fraud loss, based upon 45 cases of staff fraud.
Design/Methodology/Approach The research began with a ‘brainstorming’ session with counter fraud professionals to map all potential costs in a staff fraud. It then utilised a twin track approach of a survey and interviews. A survey was distributed using a number of methods yielding 28 usable cases. Interviews were also sought with organisations willing to discuss staff fraud, which secured a further 17 cases. Both the survey and interview used the same questionnaire, although the latter enabled a deeper questioning of participants.
Findings This study examined 45 cases of staff fraud from a wide range of sectors drawn predominantly from larger organisations. From each of these cases detailed estimates of the costs of dealing with the fraud were identified. Major additional costs included the costs of investigation, staff suspensions, internal disciplinary costs, external sanctions, permanent staff replacement, miscellaneous costs as well as intangible costs. The findings identified significant costs which are significantly above the initial value of the fraud, particularly on initial frauds under £25k.
Research Limitations/Implications Staff fraud is a very sensitive subject with many organisations unwilling to reveal what happens when it occurs. The approach was therefore to secure as much data as possible and as such this might not be representative of the broader economy.
Practical Implications The paper highlights the need for greater investment in prevention given the substantial costs of staff fraud to deal with.
Originality/Value This is the first attempt to gauge the full costs of staff fraud to an organisation.
Keywords Staff fraud, Cost, Hidden cost, Measurement
Paper type Research paper
Introduction
There are a plethora of studies of varying sophistication and validity which seek to estimate the costs of fraud to society and organisations (for some of the most high profile: Levi and Burrows, 2008; ACFE, 2012; Button et al 2012; KPMG, 2013; National Fraud Authority, 2013). These studies, however, focus upon the initial loss. The reality for most victims of fraud is that the initial fraud loss is the start of a whole series of additional costs which transpire for the organisation to deal with. There has been limited interest in the additional costs of dealing with crime in general and none vis-à-vis fraud, rooted in an evidence base founded on research. The British Home Office in recent times has attempted to estimate the costs of crime to society with two significant studies. In 2000 it was estimated the total costs of crime to society amounted to £60 billion (Brand and Price, 2000). Included in the additional costs beyond the actual loss were security expenditure, insurance, lost output, victim services, health services, criminal justice system to name most. This expanded the actual losses from the crime from £18.6 billion to £60 billion, illustrating a significant multiplier effect. However, the study did not explore fraud and it did not examine the costs to organisations internally of dealing with crime. Five years later another Home Office study was published which sought to improve on the previous focusing upon crimes against individuals and households (the former covered the commercial and public sector too) and arrived at similar costs (Home Office, 2005). Given it did not consider the commercial and public sector it is little surprise that it didn’t advance understanding of the costs of crimes to organisations in general or of fraud in-particular. Indeed fraud is missing from both.
Thus from an organisational perspective and considering fraud, there has been no research to date to estimate the additional costs. This paper seeks to fill that gap by providing estimates on the real costs of staff fraud utilising 45 cases. Staff fraud is a common problem many organisations face, which is often a subject many do not wish to discuss. This is because it frequently exposes the ‘under-belly’ of an organisation, such as the bad practices and relationships which exist. As such it is a very sensitive subject for organisations to be open about. Indeed when the authors approached some organisations seeking their participation in this research, many were unwilling to participate in the research. Some were just clear this is a subject they were not willing to discuss, others stated they had experienced no staff fraud (which seemed unlikely given their actual size).
CIFAS (n.d.) have defined staff fraud as, ‘… when a member of staff dishonestly makes false representation, or wrongfully fails to disclose information, or abuses a position of trust for personal gain, or causes loss to others.’ Staff fraud can be against the employer, other employees or customers. Staff fraud can range from exaggerating travel expenses, to personnel in positions of trust setting up false invoices to be paid to themselves, to abusing the personal information of clients to perpetrate identity related frauds. There have been only a limited number of studies investigating staff fraud and fiddles (Ditton, 1977; Mars, 1982; Hollinger and Clark, 1983). None of these studies have looked at the costs of staff fraud. It is also difficult to determine the extent of the problem of staff fraud. First, because much of it does not reach the public domain and secondly there is no specific offence of staff fraud. They can be processed under a number of different crime categories. There are a number of fraud offences, however, which can be largely linked to staff fraud in England and Wales. These are fraud by abuse of position, false accounting and fraud by company directors. The graph below illustrates trends in recent years. Fraud by abuse of position is a new offence created under the 2006 Fraud Act and much of the rise can be attributed to investigators becoming accustomed to it and as a consequence using it more. The historic offence of false accounting decline can be linked in part to greater use of abuse of position. It is therefore best to focus upon the total, which from 2007-08 to 2011-12 shows a slight increase. CIFAS also keeps statistics on the number of cases of staff fraud reported to its database covering 230 organisations. In 2011, 378 cases were reported, which had risen to 539 in 2012, a 42.6 percent increase (CIFAS, 2013). It is difficult to determine to what extent it represents a real increase or more reporting. At best these figures should be treated as a barometer of the extent of the most serious staff fraud.
Figure 1. Trends in staff fraud related offences 2007-2012
Derived from Walker et al (2009) and Taylor and Chapmin (2011)
This paper will show the substantial cost of staff fraud. It will begin by setting out the methods used for this research. It will then explore the additional costs of fraud which need to be added to the initial fraud loss. The paper will then set out some of the calculation principles used for this research before then examining some of findings in terms of costs from the research. The paper will then conclude with some recommendations for further research and a consideration of the implications for those fighting staff fraud.
Methods
The first phase of this research involved a literature search for any work which has sought to estimate the costs of staff fraud as well as processes which may form part of an organisation’s response to a fraud, such as staff recruitment costs, employment tribunal costs etc. The research team then arranged a ‘brainstorming’ session with selected staff from CIFAS and two experienced senior counter fraud managers where all potential costs were mapped. This enabled the research team to produce a questionnaire, which was uploaded to Survey Monkey. An E-Mail and web address was then circulated to CIFAS members, the Centre for Counter Fraud Studies distribution list and UK ASIS ( a security managers representative organisation) membership list asking for responses. Given the sensitivities surrounding staff fraud the aim of the research team was purely to get as large a response from a diverse group as was possible. The findings from this research cannot be said to be representative of the public, private and voluntary sectors, but they do represent the largest set of data on staff fraud cost from these sectors published to date. The questionnaire also asked if the respondent would be willing to be interviewed.
CIFAS had asked for specific sectors to be covered in the research such as: financial services, retail, public sector local, public sector central and construction. Respondents from the survey and contacts drawn from the research team and CIFAS were utilised to produce a purposive sample. The same questionnaire as for the survey was used, but the interviews provided the basis to secure more context to the fraud and probe in more depth what actually happened. It must also be stressed that staff fraud is a very sensitive subject for many organisations. Several contacts were targeted(and who usually were very open to research) were reluctant to be involved in this project. Several, who initially were interested when securing advanced sight of the questionnaire, stated they would not be able to help as they had not experienced any staff fraud. Some of these were organisations with substantial budgets employing thousands of staff. The researchers came to the conclusion that organisations are very embarrassed about staff fraud and they are even more reluctant to reveal to the outside world what has occurred.
The additional costs of fraud
The brainstorming session and literature search uncovered a wide range of costs that can be added to the initial financial loss from a staff fraud. Figure 2 below illustrates the additional costs to an organisation which can be added the initial fraud loss in the centre. Some of these costs will now be considered in more depth. Before we do so it is important to note that the general costs of the preventative and reactive structures organisations create to deal with fraud have been excluded from this analysis. One could argue, however, that the costs associated with these structures should be allocated as an overhead to any frauds. The research team took the position that all organisations above a certain size are going to have some fraud infra-structure which is an overhead. Determining these costs and then allocating them would be very challenging and complex. Therefore the focus of this analysis is the costs associated with the particular fraud under consideration.
Figure 2. The additional costs of staff fraud for the victim organisation
Fraud loss
At the centre is the fraud loss. In most cases this is relatively easy to calculate. It can, however, be more complex in some cases. For example if someone fabricates qualifications on a CV to secure a job and performs competently, is the loss the salary paid to them?
Costs of investigation
Once a member of staff is suspected of fraud it needs to be investigated. Some organisations have in-house staff capable of undertaking this, others use external staff or a mix of staff. The investigation might involve the use of specialist staff such as computer forensics or surveillance staff. The investigators may have to travel to places beyond their workplace to conduct interviews. During an investigation it might also be necessary to liaise with internal or external lawyers, forensic accountants, human resources, occupational health for advice. Some investigations might take only a few days, some may take months. These all add to the costs of the fraud.
Staff sickness/suspension costs
During and/or at the conclusion of an investigation the suspected member of staff in many organisations is suspended on full-pay. Some staff may go off sick as a result of the investigation and receive sick pay. The nature of an investigation may also mean it is necessary to suspend staff under suspicion, but who are subsequently found to be innocent. The allegations and stress of the investigation may also lead to some innocent staff going sick. This might mean the organisation has to secure an independent evaluation of the fraudster by occupational health or a doctor at further expense. Periods of sickness and suspension in some cases can go on for weeks, months and even years, adding substantial costs to the fraud. Lengthy periods of sickness/suspension, in some cases, may also lead the organisation hiring temporary staff to replace those off work, adding to the costs.
Internal disciplinary costs
In some cases of staff fraud the outcome is quite straightforward. After an investigation or on discovery of the fraud, the fraudster is confronted with the evidence and as a consequence resigns immediately. However, in many cases the fraudster goes through the staff disciplinary process. These processes vary between organisations but usually there will be the costs of putting the case together and the cost of the hearing – which usually involves senior staff. It is not uncommon for cases to be adjourned several times due to the member of staff not turning up due to sickness. This might require further medical reports. The member of staff may appeal adding further to the costs. In some cases when an employee is sacked they may take the case to an employment tribunal, thus adding further costs to the case. It is also not unheard of for staff to take out grievances against other members of staff, further lengthening the process.
External sanction costs
In many cases of staff fraud the case ends with the dismissal of the member of staff. The difficulties of pursuing a criminal sanction, resources available and fear of reputational damage are some of the more common reasons. Some cases are referred to the police for criminal prosecution and this may mean further costs to the organisation such as the production of the file, meeting with officers, facilitating further investigations and attendance at court. In rare cases an organisation might also pursue a private prosecution when there is no interest from the CPS. Some organisations on top of this or separately might also pursue a civil action, again involving similar costs for investigating staff, but also the costs of the lawyers to conduct the case. In some cases organisations pursue regulatory sanctions against the fraudster through professional bodies, which might also involve additional costs. For example in the NHS it is common to do this and many staff found to have committed fraud are referred to the relevant professional body for disciplinary action such as the General Medical Council, General Dental Council etc.
Permanent staff replacement costs
The resignation or the termination of employment of a fraudster in many cases will require them to be replaced. Depending upon the level of seniority this will incur further costs in recruitment and training. This may involve advertising, short-listing, interviewing, vetting and training costs. In some senior positions it may be necessary to turn to recruitment consultants at further cost.
Miscellaneous costs
Some cases throw up other costs. It can for example result in a fine by a regulator. For instance one large service company was fined £300k by the Financial Services Authority for poor fraud controlsas a result of a staff fraud (CIFAS/CIPD, n.d.). In certain regulated sectors, therefore, internal fraud can expose the organisation to the risk of heavy fines. In some fraud cases it might be necessary to interview lots of staff. This may take them from their duties for half a day or more. Certain occupations also often throw up additional procedures to go through, such as a Court Martial when military personnel are involved. A case might become high profile which involves media attention and as a consequence the organisation has to use or hire media management expertise.
Intangible costs
There are also costs associated with internal frauds which are very difficult to measure. One of the most salient is the costs associated with a damaged reputation. Internal frauds can be damaging to the image of an organisation and this can lead to loss of business, decline in share price etc, which are very difficult to measure (in the medium and longer term). Another intangible cost is the impact on morale of a department within an organisation that a fraudster comes from. The impact may lead to low morale and affect their performance and this is difficult to measure. This may also lead to greater staff sickness and higher labour turnover, which also incur costs for the organisation. These are clearly additional costs to the initial cost of the fraud, but because of the difficulties in measuring these, they have been excluded from the analysis of costs later in this paper. Again this is an illustration the costs presented later should be treated as an under-estimate of the total costs.