Fraud: The Last Great Uncontrolled Cost

Fraud has increased 20% since the GFC.

Fraud and charities: The great uncontrolled costWhile global research has consistently shown that the typical organisation losses 5% of its revenues to fraud each year, rates within the non-profit and international development sectors are considered to be significantly higher.  Putting this into perspective in 2013, fraud cost the OECD $7.56 billion in Overseas Development Assistance (ODA), while in the case of Australia, the non-profit sector loses around $1.53 billion a year.  And the issue isn’t expected to improve, with a recent study showing that fraud increased 20% in the first two years of the global financial crises (GFC).  Despite fraud being a significant issue for many NGOs and other non-profits, few (if any) view it as a cost to be managed and controlled.

We manage what we measure

Fraud, like any other type of cost, can be measured, managed and minimised, with the figures quoted above highlighting the current costs incurred by non-profits.  Despite this, how many of us view fraud as simply being just that, one of a number of types of costs incurred by an organisation?

By challenging our view of fraud, and shifting the focus even slightly, fraud costs all of a sudden become an opportunity, which – if managed properly – has the potential to drive significant cost savings through an organisation.  By re-classifying it as a separate ‘cost’ category, and setting up the metrics to measure it, it can start to be proactively managed.  Given where the non-profit sector is currently positioned in the fight against fraud, the potential upside is even higher, with immediate savings possible with relatively little effort.

Fraud costs can be reduced by 40% in two-years

Supporting this is a growing number of cases where organisations have substantially reduced their fraud costs in a relatively short space of time.  In each instance fraud costs have been measured, and accurate information about the fraud’s nature and extent collected.  While the speed of fraud loss reduction will vary from organisation to organisation, one study has argued that it is not unreasonable to assert that losses can be reduced by up to 40% over a two-year period.  Using the example above, this implies that  a staggering $3.0 billion in ODA, and an extra $0.6 billion for Australian non-profits can be freed up to expend on the purpose it was intended for originally!  Given the increasing financial challenges faced by both sectors, it represents a significant amount of additional funds.

However, to achieve this – or any other reduction in the cost of fraud – it is necessary to go beyond a purely reactive approach.  An organisations needs to know:

  1. How much they are losing and how it is being lost, and
  2. How well they are protected from it (i.e. their level of fraud resilience)

In other words, the key factors in reducing the cost of fraud, is not how well an organisation reacts after it has taken place, but the effectiveness of the steps it has taken to prevent it occurring in the first place.  In tis context, understanding the nature and scale of the problem is essential if the right solution is to be applied.

Key point to take away

Fraud can have a significant destabilising affect on the non-profit industry by undermining the public trust the sector has been built on.  Non-profits can take steps to turn this potential risk into a significant opportunity.  By re-classifying fraud as a ‘cost’ category, steps can be taken to measure and then manage it.  The benefits of doing this include:

  1. improved efficiencies, through freeing up funds currently being lost through fraud seepage;
  2. a reduction in reputational risk, as pro-actively managing fraud costs will reduce the risk of spill-over into the public domain, and;
  3. a competitive advantage over other players in the sector, with an effective anti-fraud programme providing the leverage to increase levels of donor trust, and increased funding opportunities.

In today’s troubled economic climate, to ignore the financial benefits of making relatively painless reductions in fraud losses seems, to me, to be somewhat of a ‘no-brainer’.

Jeremy SandbrookAbout the author: Jeremy Sandbrook is the Chief Executive of Integritas360, a global social enterprise that helps charities and NGOs/NFPs  ‘corruption-proof’ themselves. An internationally recognised anti-corruption expert, he has spent the last decade working in the international development sector, predominantly in Africa, Europe and Australasia. Jeremy also lectures on the topic at the University of Sydney’s Centre for Continuing Education.