Measure fraud and error

One of the key challenges we face in countering fraud within the public sector is limited evidence of the extent and impacts of fraud. This is because fraud is a hidden crime – deliberately concealed by those who perpetrate it.

Fraud measurement

Fraud measurement helps entities understand the impact of fraud or error on an entity or program. This can range from simply counting the losses from detected fraud and error, through to estimating undetected fraud and error using statistical sampling or other activities.

Fraud measurement is made up of 3 main elements where more advanced approaches build on strong foundations:

1. Fraud Management Information is the data collected about fraud and error that has been detected, prevented, and/or recovered. This includes recording details about each incident, such as:

   • whether the fraud was internal or external
   • how it happened
   • any control gaps or weaknesses that allowed it to occur.

   Fraud Management Information creates a valuable evidence base to help identify programs or business areas that face elevated fraud risks.

2. Fraud Loss Measurement exercises involve reviewing a statistically valid sample of transactions to identify potential fraud, error or non-compliance. This helps estimate how much fraud and error may exist across the wider program. These exercises provide a more accurate picture than relying only on detected cases and the results can be used to inform broader fraud estimates.
3. Fraud Estimates are estimates or models of an entity’s overall exposure to potential fraud, including undetectable and unquantifiable fraud. Good quality estimates require high-quality information from across the entity.

You can learn more about how to start fraud measurement activities in the How to Start Fraud Measurement Guide. The guide outlines 8 practical steps entities can take to establish or further develop capability in fraud measurement.

Fraud loss measurement explained

The United Kingdom Public Sector Fraud Authority and the Commonwealth Fraud Prevention Centre partnered to develop an International Public Sector Fraud Forum (IPSFF) Fraud Loss Measurement (FLM) Framework.

The framework’s purpose is to help public sector organisations conduct FLM exercises that provide a credible estimate of the levels of fraud and error related to a specific program, activity or function in an organisation.

FLM exercises test a sample of transactions to identify non-compliant, fraudulent or irregular transactions within the sample. From this smaller sample, the overall level of fraud and error can be estimated by extrapolating the results across the population. An ability to measure, estimate and accurately report on fraud lies at the heart of an informed and effective counter-fraud response. Organisations that are aware of their potential losses to fraud and error are better placed to implement targeted strategies to address these issues.

FLM exercises follow a 5-step process:

1. Area selection – complete or review your enterprise level fraud risk assessment or undertake strategic fraud risk profiling to identify a suitable program, activity or function.
2. Residual risk identification – complete or review a full fraud risk assessment to identify residual fraud risks and how they can be tested.
3. Planning, sampling and initial evidence – identify a sample and map out how data and evidence will be gathered to look for fraud.
4. Testing – undertake testing on all cases in the sample. Interpret results and reach a conclusion on each case.
5. Reporting and next steps – produce a report with recommendations. Use the result to inform your counter-fraud strategy and public sector fraud and error evidence base.

The benefits of proactively measuring fraud

Taking proactive action to measure fraud and error will greatly benefit organisations, helping them make more informed decisions about their risk appetite and tolerance. FLM exercises will also help organisations take considered and decisive action to reduce losses from fraud and error, and minimise the risk of reputational damage by strengthening their control environments.

Connect with us

If you are currently undertaking FLM activities or wish to start, contact us for more information. We can connect you with other Commonwealth entities undertaking this work.