02 March 2023

How local authorities can fight payments fraud

How local authorities can fight payments fraud image
Image: JARIRIYAWAT/Shutterstock.com.

For over a year, a cost-of-living crisis has gripped the nation, with many sectors battling soaring costs for utilities and goods including energy, food and petrol, as well as balancing budgets with workers calling for better pay.

Whilst the UK economy has performed better than experts initially predicted, a flatlining economy means the level of fraudulent activity faced by the UK as a whole is increasing , higher than the levels experienced throughout the pandemic.

These compounding elements create a perfect storm for local authorities which need to continue providing vital services in the face of economic pressure. Public sector fraud and error loss is estimated to be at least £33bn a year - with the end result meaning an increase to the cost of public services. Understanding, identifying and reducing risk when it comes to fraud is an essential part of government efficiency, and councils must move quickly to protect against the threats that may be lying within their finance departments.

The role of automation in reducing risk

Maintaining strong controls over finances is the clearest way to tackle fraud. Malicious operators can exploit weak links in the Source-to-Pay (S2P) cycle to their benefit.

Inadequate financial controls and a lack of oversight over financial processes, such as invoicing and payment approval, increase the risk of mandate fraud. People or organisations purporting to be existing suppliers can request amendments to payment details, or submit fraudulent invoices. Three years ago, the shift to lockdown working may have seen local authorities operating with a reduced, skeleton staff, meaning personnel were required to take on additional duties. Though we are back to ‘normal’ working patterns, a hangover symptom may still remain in a lack of clear segregation of duties, which can make it easier for fraudsters to manipulate financial transactions or commit fraud undetected.

Simple measures, like ensuring supplier contact details are up to date, and invoice ‘approvers’ are clearly assigned a role in identifying the origin of invoices, and detecting irregularities in financial transactions or procurement processes, can help to mitigate risk. Clear policies around which suppliers can be enlisted, raising POs, and even the types of invoices you accept will also help.

However, the development and implementation of financial controls, if done manually, can be a time-intensive process – and with heightened risk, swift solutions are required. This is where technology can come in.

Digitalisation of the S2P cycle can help to ensure that procurement processes are fully documented and compliant, creating a transparency that makes it easier to monitor financial transactions and procurement activity closely for signs of fraud.

Bringing manual systems online delivers a clear audit trail of all transactions, meaning local authorities can efficiently ensure they are fully documented and compliant with ever-changing, complex regulations. Through the automation of financial processes, such as invoicing and payment approvals, there is a reduced need for manual intervention, creating a more streamlined and secure process. This can also reduce the risk of human error and the potential for fraud at an internal level.

Enhanced supplier due diligence, through a centralised database of supplier information, will ensure that contractors are legitimate. Digital systems can also provide real-time data analysis and monitoring at the click of a button. This can be particularly useful in identifying unusual patterns, or fraudulent activity across multiple transactions or over an extended period.

While the concept of introducing new digital S2P procedures may seem a daunting task at first, modular finance solutions offer the flexibility to implement systems designed to target specific needs, which can be scaled up or down. A modular approach can deliver quick results, enabling agility – an important consideration for local authorities that are often facing ever-changing legislation.

The cost of doing nothing

Indeed, the benefits of implementing digital procedures in cash flow management far surpass any initial cost commitments. At a time when local authorities, and organisations throughout the UK, are cash strapped due to wider economic pressures, loss of funds to fraud is an added, unwelcome cost.

Reducing the risk of fraud is a priority, however, the introduction of automated payment systems brings benefits beyond this – it can also deliver transparency and cost-savings.

In a bid to streamline its manual processes to reduce costs, Wigan Council adopted automation within its accounts payable (AP) system, allowing paper invoices to be rapidly converted and stored as electronic images. This simple move increased visibility and transparency, and eliminated the source of bottlenecks and errors. Regular handling of 90,000 invoices became a much smoother process, increasing efficiency by two thirds, meaning valuable resources could be directed elsewhere. The overall impact was a significant saving in annual invoice processing costs to the tune of £120,000. The cost of doing nothing, therefore, is immense.

Every organisation faces challenges unique to their operations – meaning there is no blanket solution, and no requirement to entirely overhaul existing financial structures. The Covid-19 pandemic brought about an intense period of change, and economic pressures due to wider macro-economic factors remain – however, it is important that progress is not stalled. Attention must turn to current and future needs to ensure controls are not lax, so the time to step back and take a holistic look at S2P systems is now. An internal audit of organisational structures can identify weak spots, and digitalisation offers a variety of solutions to prevent fraudulent activity, and opportunities for savings.

Ilija Ugrinic is commercial solutions director at leading S2P software solutions provider, Proactis.

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