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Housing Associations – The impact of human error when countering fraud

Summary

The impact of larger scale losses caused by employee or third party fraud to Housing Associations is increasingly prevalent in the sector. In this article we look at the impact of human error on the failure to detect and prevent fraud and how losses can be suffered as a result.

Setting Scene

Picture the scene, there you are, Director of Finance for a Housing Association with a £40M+ turnover, 750 employees and ownership of 8,000 properties but you have a sense of despair with your job. The reason? You are towards the end of the process of dealing with the fall out of a procurement fraud discovered in the property maintenance division and are sat in your office considering the impact of the draft Judgment received from your regulator, the HCA that morning. They have made a decision to downgrade your Governance and Financial Viability rating and are now delivering a Judgment which will be in the public domain setting out how your organisation failed to detect the on going nature of a procurement fraud involving one of your senior procurement managers.

A loss has been suffered of almost £500,000 let alone considering the additional costs of investigation, management time, reputation and external advisors. Throughout the whole process since discovery of the fraud to this very moment, you have been asking yourself time and time again how did this occur when all the correct policies were in place to deal with the procurement process coupled with a strict framework agreement environment for the contractors engaged.

The Impact of Human Error

The answer however is not in your documents, policies and procedures but it is with your people, more specifically your employees. In the above example, the policies were in place relating to the use of specific contractors and the process for placement of contracts with value in excess of £10,000 where 3 contractors should ordinarily have been approached for tender. The need to follow a framework agreement was also in place. However the property maintenance division had free reign to deal with their contractors and had over time developed a preferred contractor with the majority of work being placed through one procurement manager. Nobody questioned the significant volume of work being placed with one of the contractors because everybody felt that they were doing a good job.

Unfortunately, as a result, the organisation overlooked that procurement rules were being circumnavigated and had those issues been picked up at an earlier stage, it may have been discovered that the employee dealing and placing work was indirectly benefitting financially through the maintenance contractor itself.

It stands to reason that the fraud involving the employee may not have been easily detected. Questions no doubt would have been raised and would have certainly put the fraudulent employee in the spotlight, if correct procedures were put in place to follow through what the policies had stipulated. If the procedures had been looked at in relation to tendering for work in excess of £10,000 or if an audit had taken place as to how budgets had been used in that maintenance division and apportioned to its contractors, these indiscretions and diversion from standard required practice had a better prospect of being detected. Ultimately, when checks and balances are not applied due to human error or omission, fraud can go undetected for a number of years.

In cases our team have advised upon, many instances of fraud could have been prevented had the correct level of due diligence been applied by accounts, employees or those with supervisor responsibilities ensuring compliance with standard policies and procedures. By way of an example, a number of our clients have unfortunately suffered loss caused by third party payment diversion fraud following receipt of an instruction from a contractor setting out the change of bank account details to be utilised for future payments. We have seen a number of cases in the past year where sums in excess of £100,000 have been paid out by organisations in such circumstances only to subsequently discover after receiving contact from the legitimate contractor that the next instalment of payment had not been made.

Other frauds which are common place in the sector such as manipulating payroll or contract payments for the fraudster’s benefit, exploiting the lack of controls in the care and maintenance division to allow exploiting of vulnerable users or overcharging against a schedule of rates often could have been limited or avoided if the ordinary controls stipulated by policies and procedures were applied in practice.

Impact of Fraud

Fraud is a newsworthy issue if a housing association is found to have suffered losses to fraud. The direct correlation between human error and the failure to reduce the risk of fraud is often forgotten or overlooked and the consequences can be dire. To look at the initial example in this article one would ask where does this leave an organisation who has suffered from such lapses in human error and from dishonesty caused by an employee? For example, does a fidelity or corporate crime insurance policy protect the loss? Well, not always is our experience, we have seen that the nature of the fraud and reporting of it has to be quite precise in order for some of these policies to respond.

So we are again left looking at the situation for the Director of Finance sitting there with his draft Judgment from the HCA in his hand. The impact over the past 8 months since discovery of the fraud has been huge. Internally one considers management time, additional board meetings, internal interviews, dismissal proceedings, liaising with the HCA, locating documents as all part and parcel of the additional work required to deal with the fall out of the fraud discovered. Externally, there is a time and management required to liaise with insurance brokers, the police, PR, legal advisors and the tasks that come out of those investigations. Internal auditors or forensic accountants will be called upon to consider the nature of the loss. There is also the reputational and financial loss. Finally you have the regulators verdict, with all the practical impacts now suffered, you are left having to explain a downgrading of your rating, recognising that with your entire workforce, there is a need to be on message in relation to how to approach the future.

Conclusion

The question is therefore asked, could it have been any different? In our experience, yes. Your employees are vital in the process of combatting and detecting fraud. If the correct practical counter fraud procedures, audits and health checks were carried out diligently on an annual basis, many of the frauds we have advised housing association clients about may not have had the significant impact that did or feasibly would not have occurred at all. The message is plain. When it comes to fraud, dealing with fraud prevention is far better than dealing with fraud reaction. The costs are far less as well as all the other impacts which have been set out in this article.

Whilst DWF’s Fraud and Risk Services Team offer specialist advice dealing with discovery and reaction to fraud, the team often now provide costs effective commercial advice and solutions to organisations on fraud prevention be it from policy implementation and procedure reviews to provision of fraud helplines.

However, as with many of our clients who have only considered engaging lawyers when the issue has arisen, if you do find that you’re an organisation in need of advice on a fraud related issue, you should always act quickly and our specialist team will no doubt be able to assist. Our team advises organisations in both the public and private sectors as to dealing with issues of fraud and commercial dishonesty. We are one of the few firms nationally who have a dedicated Commercial Fraud Team but significantly our team is one of the very few firms that has specific sector expertise in respect of fraud issues impacting on housing associations understanding the full range of issues including their regulatory environment.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.