Low morale among state employees boosts fraud

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Public sector fraud is soaring amid mounting disillusionment among state-employed workers who see a bleak future of job cuts and pay freezes, according to a report to be published today by PricewaterhouseCoopers.

The report, Fraud in the Public Sector, analyses the responses of senior representatives of government or state-owned enterprises across the world, including 44 from the UK.

More than half of the UK respondents (52 per cent) say their organisation has suffered economic crime during the last year compared with a global average of just 32 per cent.

A majority of UK respondents also report increases in levels of economic crime over the last year, while most say they believe that their organisations are at greater risk in the current economic environment.

Staff reductions also mean that fewer resources are being spent on internal controls while internal auditors are being asked to do more with less – in common with the entire sector. However, this means frauds increasingly go undetected.

The report finds the measures of both asset misappropriation and financial statement fraud are significantly higher in Britain than the global average.

Ian Elliott, a partner at PricewaterhouseCoopers LLP, also warns that the pressure on the public sector from government plans to cut spending sharply means people are far more tolerant of fraud than usual.

Says Mr Elliot: "Our experience tells us that economic pressures have a direct effect on people's ability to rationalise fraudulent actions. And we know for a fact that these pressures are going to be felt sharply in the public sector in the coming years."

He adds: "Our report also finds that public-sector fraud has a disproportionately negative effect on reputation, employee morale, business relationships and relationships with regulators. Organisations need to make sure that they have regular reviews and the right fraud policies in place."

The report finds that, in contrast to the private sector, where middle managers are the main perpetrators of fraud, public-sector fraud tends to be committed by junior members of staff. However it warns that this could change as spending cuts begin to bite and staff feel increasingly disgruntled.

Many state-employed workers are furious at the plans for job cuts and pay freezes, feeling that the financial crisis was nothing to do with them, having been caused by banks.

While the banks have been bailed out and have returned to paying huge bonuses, the public sector is continuing to suffer as a consequence of the mismanagement of the financial services industry. Comparison with private-sector samples, the report found, suggests the UK public sector has greater exposure to external fraudsters than many other countries, with over half the UK respondents reporting the world beyond national borders as the source of economic crime.