Public Services Management: Auditors earmark fraud in councils: Local authorities are big business - which means cheating them is big business, too. Paul Gosling investigates

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THE TRIAL begins this week of Derek Hatton, former deputy leader of Liverpool City Council, accused of conspiring to defraud the council in relation to land deals. Although it is only the high-profile figures such as Hatton who catch the public's attention, allegations of fraud in local government are common. Councils are big business, with even medium-sized authorities having turnovers to match major corporations. And that means that fraud is big business too.

Local authorities assert that fraud is no more widespread in councils than in the private sector, but that commerce keeps more quiet about it. Arthur Boulter, head of local government finance at the Chartered Institute of Public Finance and Accountancy (Cipfa), says: 'The amount of fraud is relatively small. On all the major problems in finance, such as the (interest rate) swaps and BCCI, there has been no suggestion that there has been fraud.'

Yet an investigation by the Independent, published last January, revealed that 19 out of 32 London boroughs were being investigated for major frauds, particularly regarding housing benefits, and so-called 'keys for sale' incidents, where housing officers were alleged to have privately rented out council properties for their own gain.

An internal audit report, dated October 1991, for just one council, Hackney in east London, showed 76 investigations to have taken place in the preceeding six months. Several of these were into irregularities on the payment of housing benefit, with one officer alone allegedly having fraudulently obtained pounds 150,000. There were seven investigations into employees apparently failing to declare interests in outside businesses with which the council was dealing.

Some 150 employees of the borough were identified as squatting in the council's houses. A theft of pounds 200,000 worth of equipment was stolen 'under highly suspicious circumstances suggesting possible involvement of employees'. Other equipment worth pounds 100,000 disappeared from an external grant-funded organisation. Many education grant cheques had apparently been stolen.

Brent is another council which has badly suffered. Recently eight former employees were among 12 people charged resulting from a 'keys for sale' inquiry. Brent has also been investigating around 200 student grant applications, worth pounds 2.4m over three years. This, along with similar inquiries elsewhere, has led to the Department of Education introducing more stringent rules for the handling of grant claims.

The Department of Social Security is also tightening up on procedures, on housing benefit and council tax applications, and providing a pounds 50m incentive to councils to root out fraudulent applications.

It is councillors as well as officials who stand accused. Derek Hatton and others face charges arising from allegations of improper land deals. A file on councillors in Tower Hamlets has been forwarded to the Director of Public Prosecutions, following allegations that market stalls were allocated in return for money.

Elsewhere councillors and officials have faced allegations of taking bribes in return for planning approvals, home improvement grants and housing allocations. The general shift towards clearer criteria on such matters should reduce the allegations in future.

The Audit Commission produces a quarterly report, summarising the results of investigations into frauds worth more than pounds 500 each. According to the 1991 / 2 report, there were 105 revealed frauds in councils, to a value of pounds 950,000. However, this significantly understates the real level of fraud as it only includes cases prosecuted and finalised, that have been reported to the external auditor, and reported in turn to the Audit Commission.

According to the Commission's figures, the most common fraud involves education grants, through stolen cheques and false applications. Nearly as problematic is housing benefit fraud. Internal auditors say that fraudulent community charge benefit claims are also common.

One of the cases highlighted by the Audit Commission involved 22 employees of a police authority, including two police officers, who stole cash and stock from a canteen at a training school.

Serious investigations will normally be undertaken jointly by internal audit and local police fraud officers, between whom there is usually a good working relationship. There can nevertheless be a culture within individual departments of rebuffing all investigators. One fraud detective said that as soon as an alleged fraud was notified to a particular council, all the files would usually 'disappear'. More commonly, council treasurers who are in charge of internal audit operations, working with chief executives, will arrange for all relevant files to be sealed, removed and properly examined.

Internal auditors have a reputation within local authorities for severity. 'They are the type of people who visit the battlefield in order to bayonet the wounded,' explains one council chief officer. Yet they must combine scrupulous integrity with a demeanour that brings forward the 'whistle-blowers'. Glasgow's chief internal auditor, J R Harold, said that most fraud came to light through anonymous letters and phone calls. The relationship between the internal and external audits is also key.

External auditors are appointed by the Audit Commission, 70 per cent conducted by the district auditor, and the rest by leading private firms. Steve Valentine, a partner in Price Waterhouse, says that frauds are seldom very large. 'They are mostly housing benefit or community charge benefit. It is very unusual for there to be frauds involving millions, though they may be significant like pounds 40,000 to pounds 50,000. Some of the bigger ones involve landlords fiddling rent allowances on their properties.'

One of the most important tools for auditors, whether doing internal or external audits, is to compare the performance of one council with a basket of similarly sized councils. Detailed figures are produced for this purpose by Cipfa.

One internal auditor said that effective operations needed 'a high calibre of staff with academic experience, with computer skills, working to a plan, with first-class facilities, and it is absolutely critical to have good relationships with the legal section and the police. We want people who can work as an iron hand in a velvet glove.'

The work of internal auditors has statutory backing, with a right of access to any part of the council's operations - and to demand answers. An internal auditor said this was particularly important in order to deal with trade unions that may try to block their work. If councillors or a council committee were to try to stop them they have the legal capacity, through the treasurer and chief executive, to act independently.

Auditors say that despite the publicity given to council fraud cases, the level of incidence is probably actually decreasing, although the contracting out of services has led to new risks, which auditors are watching carefully. The quality of internal systems has improved, and, auditors say, the message has got through that there must be checks, and separate individual responsibilities for ordering, approving invoices and making payments. The biggest danger here, one says, is the move towards devolved responsibility, smaller business units within authorities, and grant supported external agencies.

Some councils have been worried for some years about the scope for fraud within external grant-aided bodies. 'It's the snag with grant-maintained schools,' an internal auditor explains, 'it may be all down to one person, with no checks on that individual. Some schools may be more geared towards the academic than the clerical, and you may have one woman who does the school meals who really shouldn't also be doing the books.'

Another area of expressed concern was the resistance by unions to moving to credit transfers, which auditors are keen to introduce to avoid cheque thefts. One complained that unions were just trying to maintain job levels at the expense of improved security.

However, the problem has to be put into perspective, and it would be easy to spend more money on improving systems than the fraud itself is costing. One auditor says: 'The biggest problem is with school arson and vandalism, compared with that fraud is just on a small scale. There's always going to be some petty theft and inflated mileage, but it's getting less, and there is so little sympathy for it now around the workplace because of the shortage of money for local authorities.'

(Photograph omitted)