Measuring the cost of fraud: an opportunity for the new competitive advantage
| Date | 29 December 2011 |
| Pages | 65-75 |
| DOI | https://doi.org/10.1108/13590791211190731 |
| Published date | 29 December 2011 |
| Author | Mark Button,Jim Gee,Graham Brooks |
Measuring the cost of fraud:
an opportunity for the new
competitive advantage
Mark Button
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK
Jim Gee
Counter Fraud Services Department, MacIntyre Hudson LLP, London, UK, and
Graham Brooks
Centre for Counter Fraud Studies, University of Portsmouth, Portsmouth, UK
Abstract
Purpose – The purpose of this paper is to provide evidence, from the analysis of 132 fraud risk
measurement exercises, of the average costs and rates of fraud. It advocates greater use of more
accurate measurement which if monitored and repeated can secure reductions which could amount to a
new competitive advantage.
Design/methodology/approach – This paper has analysed 132 fraud risk measurement exercises
from nine countries in a range of different sectors. Only those which assess a statistically valid sample
which have sought and examined information indicating the presence of fraud, error or correctness in
each case within that sample; have been completed and reported; have been externally validated; have a
measurable level of statistical confidence; and have a measurable level of accuracy were included.
Each exercise has been assessed to determine the percentage lossrate (PLR) and the fraud frequency rate
(FFR). These data were analysed using Excel to determine average rates and further comparable data.
Findings – Fraud and error losses in an organisation should currently be expected to be at least
3 per cent, probably more than 5 per cent and possibly more than 9 per cent. The PLR when first
measured has been found to be 5.40 per cent and 4.61 per cent when last measured, representing an
average reduction of just under 15 per cent. The paper shows fraud and error can be measured and if
regularly this incentivizes action to reduce it reaping financial benefits to the organization.
Research limitations/implications – The vastmajority of thedata are drawnfrom fraud risk
measurement exercises in the public sector in large organizations.
Practical implications – The paper advocates greater use of fraud riskmeasurement and counter
fraud strategies tailored to reduce losses.
Originality/value – This is the first analysis of fraud risk measurement exercises across the globe.
Keywords Financialcrime, Fraud, Competitive advantage,Risk analysis, Public sector, Measurement,
Fraud risk measurement
Paper type Research paper
Introduction
In an era of tighter budgets and more competitive markets organisations are looking for
innovative ways to reduce costs. Many strategies and innovative ideas have been
pursued, from contracting out to flatter management structures; to achieve what is often
described as “competitive advantage” (Porter, 2004; Briggs and Edwards, 2006).One
measure which has not been on the “radar” of the vast majority of organisations to
achieve this aim is investing in measures to counter fraud. This paper will show that
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Measuring the
cost of fraud
65
Journal of Financial Crime
Vol. 19 No. 1, 2012
pp. 65-75
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791211190731
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