There are many estimates of the cost of fraud to organisations that are regularly published, and which range significantly in size - all generate debate on their validity and the methodologies used. However, all have one thing in common: they only focus on the actual fraud loss to an organisation. This is often just the tip of the iceberg as fraud generates a response from the victim organisation that inevitably costs money - often a lot of it.

Over five years ago, when we conducted research on the real costs of internal fraud to organisations, we identified a wide range of costs that companies incur when dealing with frauds. These included:

• Costs of investigating the fraud
• Costs of staff suspensions/absence
• Internal disciplinary costs
• External sanctions costs
• Permanent staff replacement costs
• Intangible costs - damage to reputation, staff morale changes etc

These hidden costs of dealing with fraud can add up to significant amounts. They demonstrate the importance of preventing fraud in the first place, most notably when low-value fraud is identified. For example, the research found that the cost of dealing with fraud, particularly low-value cases, is very high:

• Fraud under £1,000 can cost £19,793 to deal with, on average.
• Fraud between £1,000 and £25,000 can cost £24,574 to deal with, on average.
• Fraud between £25,000 and £100,000 can cost £37,741 to deal with, on average.
• Fraud between £100,000 to £1 million can cost £166,752 to deal with, on average.

(Data on the cost is available in our full report.)

By examining just one case study from the finance sector, it illustrates how these costs can mount up. In this example, a bank teller started to withdraw cash from a customer's account to fund drinking and socialising. In total, around £20,000 was stolen from the customer. When this was discovered he confessed immediately. He was suspended for a week on full pay before being dismissed - amounting to a cost of £493. The cost of the investigation for this case amounted to £7,675, combined with £329 in costs for human resource involvement. The disciplinary hearing amounted to £219 in costs. The case was referred for criminal prosecution, which resulted in 12 months imprisonment, but no further costs were accounted for, and the fraudster had no assets so no money could be recovered. One new member of staff was recruited to replace him at a cost of £1,350, according to the CIPD scale. In addition to the £20,000 loss - which the bank had to refund to the customer - this case cost a further £10,066, leading to a total cost of £30,066. 

The research above only covers internal fraud. We are now conducting research for Synectics Solutions to identify the costs of dealing with external frauds, such as those by contractors, customers or organised criminals, against organisations. To achieve this we are looking for people in organisations who have overseen external fraud cases and can identify what happened as a result of the incident to complete our online questionnaire. 

We would also like some volunteers to be interviewed to secure some more detailed case studies, similar to the one above. All information will be anonymised. If you are interested in this, please contact me at: mark.button@port.ac.uk. We look forward to hearing from you.