Local Government Reorganisation (LGR), whether through mergers, restructures, or the creation of combined or unitary authorities, offers essential opportunities for improved services and greater efficiencies and any period of change also significantly elevates the risk of fraud.

During transformation, multiple factors create vulnerabilities that determined fraudsters can and will exploit:

• Disrupted controls: normal controls protecting public funds may be temporarily suspended or break down as new structures are implemented.
• Staff distraction and confusion: staff focus is often shifted to change management and maintaining services, leading to distraction and reduced vigilance.
• Evolving governance: changes in responsibilities and interim governance arrangements create loopholes.

Investing time and resource in actively managing these heightened fraud risks is a key way to protect public money during these times.

Key fraud risk areas in local government reform

Working with clients undergoing change, we consistently identify several common themes where fraud risks increase:

• Procurement and contracts: conducting urgent procurement to award contracts for new systems or consolidate suppliers which creates opportunities for splitting contracts, intentionally avoiding tender thresholds and undeclaring potential conflicts of interest.
• Payroll and HR: staff changes create risks including ghost employees, unauthorised payments, manipulation of redundancy calculations and failure to remove leavers from merging systems.
• Financial systems: segregation of duties breaking down, temporary access rights becoming permanent and data migration errors enabling manipulation.
• Asset management: assets can be lost or misappropriated equipment not properly transferred, property disposals at undervalue, IT assets disappearing and data inappropriately retained or sold.
• Cyber security: while cyber-related risks are ever changing, periods of change and transformation increases vulnerabilities through phishing, email compromises targeting finance teams along with insider threats from disgruntled staff.

What councils should be considering

To proactively deter, prevent and detect fraud, councils need a structured approach that embeds counter-fraud throughout the transition:

• Robust and flexible risk assessment: conducting a comprehensive fraud risk assessment specifically for transformation activities is key, ensuring this remains flexible and can be adapted to reflect both new and emerging risks as the reform progresses.
• Strong culture and communication: clearly communicating a zero-tolerance policy to fraud, regardless of transformation pressures is key. Providing training on specific fraud related risks and communicating the tools for how concerns can be reported, along with outlining the protections afforded to whistleblowers.
• Adequate resources: ensuring the investment in counter-fraud resources during periods of change continues or is enhanced.  Sufficient time must be allocated to fraud related input and contribution to key activities and maintaining access to investigative capabilities must be preserved.

Implementing safeguards

Moving beyond general considerations, councils must implement specific, robust safeguards:

• Continuous monitoring via data analytics: implement continuous monitoring of high-risk transactions. Utilise data matching to systematically identify anomalies that require review and investigation.
• Access control review: immediately review all temporary system access rights granted during the migration or setup phases and ensure they are revoked or permanently adjusted once the activity is complete. Re-validate segregation of duties in all new financial systems.
• Enhanced due diligence in procurement: for all urgent or consolidated contracts, implement an enhanced due diligence process that includes mandatory, independent verification of supplier details and explicit, written conflict of interest declarations from all decision-makers.
• Leaver and starter protocols: create and strictly enforce a protocol for leavers and new starters across all merging entities to prevent ‘ghost’ employees. This includes synchronised removal from HR and payroll systems and immediate revocation of physical and digital assets.

The proactive choice

Local government reform offers tremendous opportunities, but without attention to fraud risk, transformation can be a costly challenge. Fraud prevention is not a barrier to transformation. The critical choice for any authority is not whether fraud risks can be managed during this change, but whether it will choose to manage them proactively or reactively. Maintaining robust controls during this disruptive period can protect public funds and deliver the intended benefits of local government reform.

To discuss any of these issues and to see how we can help you navigate LGR, contact Daniel Harris or Andrea Deegan today.

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