Australian Institute of Criminology

Skip to content

Fraud risks for the Commonwealth

In this report, findings of a census of Commonwealth entities regarding their experience of fraud and their responses to fraud against the Commonwealth are presented. Data were collected for three financial years from 2010–11 to 2012–13 regarding the type and cost of detected incidents, the number of incidents investigated and the prevention and control measures adopted by entities.

In the Commonwealth, opportunities to behave dishonestly arise for both public servants and consultants working for the government (internal fraud), as well as for members of the public who have dealings with the government, such as when obtaining benefits or paying taxes (external fraud). Each year, considerably larger numbers of suspected external fraud incidents are detected than internal fraud incidents.

In relation to internal fraud, the principal fraud risks to address relate to internal controls, recruitment practices and risk management generally. Over the three years examined, suspected internal fraud reports declined by 56 percent. This was due to a large reduction in fraud incidents detected by a small cohort of entities that experienced a substantial number of incidents, rather than across all Commonwealth entities. A large number of detections using internal controls were reported by two large entities in 2010-11, mostly due to the use of data analytics and data mining activities. Detected internal fraud by these entities declined in subsequent years.

In relation to external fraud, risks arise in connection with the provision of new benefits, the introduction of new taxes, procurement practices, government-funded programs and the use of consultants. While the risks relating to fraud involving welfare payments or visas may appear high due to the large number of incidents detected, these fraud types only affect the few entities that are involved in delivering these services. In addition, as a proportion of the number of transactions undertaken, the incidence of suspected fraud is relatively low in these areas. These large entities and others that administer revenue collection, have sophisticated fraud control measures in place to detect suspected instances of dishonesty.

A consistent trend over the years was that higher levels of fraud, both internal and external, were detected by larger rather than smaller entities. This finding has also been found in organisational fraud surveys conducted by KPMG (2013), PricewaterhouseCoopers (2012) and the ACFE (2014). Possible reasons for this are that larger organisations provide more opportunities for fraud, owing to the complexity of their operational structures, the larger sums of money with which they deal and the range of services provided, including those relating to taxation, welfare and immigration. It might also be the case that larger organisations are better able to detect fraud than smaller ones in view of the extensive fraud control activities they undertake.

An area of emerging risk that is apparent from the current research concerns corruption and collusion between external actors and those working within government. It was found that both the number and cost of collusion-related fraud has increased over the last three years, although the number of incidents was relatively low. In 2010–11, entities reported nine incidents of collusion without financial impact. However, in 2011–12, entities reported 35 incidents of collusion, worth $2,200; while in 2012–13, there were 17 incidents involving collusion, which cost $402,764. Prior research has found that incidents that involve collusion are likely to result in greater financial losses, last longer and have greater impacts on morale within organisations (KPMG 2013). Corruption was the internal fraud method that affected the highest number of entities. Fraud involving Commonwealth grant monies and aid programs are also areas of ongoing risk, particularly in view of the large amounts of money provided by the government each year for these purposes. Further research is needed to explore these areas of fraud risk in more depth.

By contrast with the decline in the number of incidents of internal fraud, the costs associated with internal fraud incidents increased from just under $3m in 2010–11 to just under $3.5m in 2012–13. In particular, the costs associated with collusion and corruption rose sharply, with incidents of collusion costing entities $402,764 in 2012–13. As was to be expected with the increase over the years of incidents of external fraud, the costs associated with external fraud increased from over $116m in 2010–11 to over $203m in 2012–13. Overall, the total amount lost to fraud in 2010–11 was $119m and rose to $204m in 2011–12; it continued to rise in 2012–13, with losses incurred by entities standing at over $207m. This is reflected in the reported value of frauds accepted for investigation by the AFP each year.

The present research also found that the main focus of both internal and external fraud was on financial benefits received by individuals. In 2010–11, there were two distinct foci found for internal fraud incidents—information and financial benefits. In the case of external fraud, the specific focus that resulted in the highest number of incidents concerned ‘entitlements’, particularly to do with revenue, visas and citizenship applications, welfare payments and health benefits.

The results presented highlight the ongoing need for individual entities to be aware of the unique risks they face and to work continually to update fraud prevention strategies and control plans so they are tailored to the current risks. Further, the research provides important data on the areas of fraud risk that Commonwealth entities are faced with and how they prevent and respond to such risks. The tasks for the future lie in improving the quality of information that entities collect on fraud risks each year in order to enhance the utility of the current research. Having accurate and policy-relevant data will provide an important evidence-base that all Commonwealth entities can use in identifying new and emerging risks, and in planning how best to avoid financial losses and other impacts on government operations in the years ahead.