Addressing fraud risk in public sector organisations: a theoretical underpinning

Abstract

This explanatory study uses desktop and library methodology to explore and present the existing literature on fraud and how it can be mitigated in the public sector. The paper finds that fraud— substantially motivated by pressure, opportunity and rationalization—presently causes an average loss of 5% of typical organization’s annual revenue, in addition to massive hidden costs. It further identifies ubiquitous frauds areas in public sector organisations, namely: benefit, procurement, tax payroll, accounting and litigation, pension and national health services, students finance and council tax fraud. It reveals the “Big 5’ fraud in this context to include asset misappropriation, procurement fraud, bribery and corruption, human resources fraud and accounting fraud. The paper documents pervasive fraud preventive controls to include creation of anti-fraud risk culture through fraud policy and code of conduct; general, physical and computer based fraud controls; employment screening and third party due diligence; fraud and misconduct risk assessment; fraud and ethics awareness training and accountability; and defining fraud roles and responsibilities. The common detective methods of detecting fraud include the use of tips, bank reconciliation, whistle blowing programs, audits and reviews, job rotation and mandatory leave. The results infer that fraud can be mitigated through effective anti-fraud controls. It urges public sector entities to develop and implement an instutionalised fraud risk management system, and calls for empirical studies of this nature.

Keywords: fraud, fraud risk, public sector organisation, anti-fraud program, internal controls