The Comptroller and Auditor General (C&AG) and head of the National Audit Office (NAO) Gareth Davies has qualified his regularity opinion on the Department for Business, Energy and Industrial Strategy (BEIS) 2020-21 accounts because of material levels of fraud in COVID-19 business loans and business support grants.

This followed a warning by the Public Accounts Committee (PAC) in a June 2021 report that fraud and error in the COVID-19 schemes could reach billions. Both the HMRC’s 2020-21 accounts and the recently published BEIS 2020-21 annual report and accounts report high levels of fraud in COVID-19 support schemes.

The media headlines have focused on the £4.9bn of estimated fraud reported in ‘bounce back’ business support loans that were guaranteed by BEIS, together with a further £14.9bn of loans that the Department estimates will not be repaid.

However, there has been less attention given to an estimated £1.0bn of fraud in the three initial COVID-19 business support scheme grants paid to ineligible businesses. These grants were funded by central government but paid by local authorities acting on behalf of BEIS. 

BEIS’s estimate of £1.0bn of fraud covers the three grant schemes introduced during the first period of restrictions between March and June 2020, within a range of £0.5bn to £1.6bn. These schemes disbursed £11.5bn, meaning the estimate of losses due to fraud was 8.9% of total payments. 

The annual report acknowledges this estimate is subject to significant uncertainty as it is based on a sample of only 476 payments out of a total of over a million. 

The actual levels of fraud could be even higher as the checks performed by BEIS are “not capable of finding more complex fraud” and make the assumption that the payments in local authorities that have provided returns are representative of the level of fraud in local authorities that have not submitted returns or have submitted delayed returns.

Moreover, the estimate does not cover the estimated £7.2bn of payments made under the four grant schemes introduced from September 2020 as restrictions started to return. BEIS states that it expects the level of fraud to be lower in these schemes but has not yet started to carry out verification work.

The C&AG’s report states that the “Department has not been able to produce a single, statistically reliable estimate of fraud and error in this grant expenditure” and, as a result, the audit has not “sought to obtain assurance over the precision of the estimated range of fraud and error in these grant schemes”. The report states that the minimum level of fraud is material.

The report also states that the pre-payment assurance checks carried out by local authorities were probably inconsistent and that BEIS’ efforts to calculate the level of fraud have been hindered by the timeliness and variable quality of information provided by local authorities.

ICAEW contributed to the Fraud Advisory Panel submission to the June 2021 PAC inquiry into fraud and error during the pandemic. This submission explicitly sought to draw the attention of the committee to these grant schemes, commenting that it would be very difficult for BEIS to estimate the level of fraud in the the two largest schemes, the Small Business Grant Fund (SBFG) and the Retail, Hospitality and Leisure Support Grant Fund (RHLG), and for the NAO to audit this estimate.

These schemes were administered by local authorities using funds provided by BEIS, which set the eligibility criteria and informed local authorities that it would stand behind payments made in line with its guidance. As a consequence, local authorities were acting as agents of BEIS, which means the expenditure has not been reported in local authority accounts and has been treated as outside the scope of local authority audit opinions.

Local authorities were under pressure by ministers to pay grants “as quickly as possible”, however, they only received pre-payment assurance guidance from BEIS in June, two months after the schemes had been launched. Although there were mitigating factors given the pressure on central government at the time, this is an example of how it needs to improve the way in which it works with local government.

Oliver Simms, Manager, Public Sector Audit and Assurance, at ICAEW commented: “The BEIS accounts report almost £6bn of losses due to fraud with the potential to be significantly higher. BEIS quite rightly acted quickly to support businesses at the start of the pandemic, but, as the Fraud Advisory Panel submission to PAC noted, there is a lot more that government could and should have done to prevent predictable frauds.”

“The COVID-19 business support grants process carries important lessons for how central government must improve how it works with local government. Stretched local authority finance teams were instructed to make payments quickly without sufficient accompanying guidance and so it is unsurprising that the extent of pre-payment checks and quality of data in returns has varied between local authorities.

This experience has also highlighted a gap in auditing coverage, with payments made by local authorities acting as agents for central government departments not being covered by local audits, leaving the National Audit Office without the evidence it needs on which to draw conclusions.”