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Fraud  - Fraud

Charity Fraud

Charity Fraud Awareness Week ran from 21 – 25 October which meant the issue of fraud in the charity sector is on a lot of our minds. Jonathan Orchard at Sayer Vincent provides a breakdown of the risks charities face and what can be done to combat them.

I am often asked whether charities are more or less at risk from fraud than other types of organisation. My response is usually that they face some different specific risks as well as many common risks. For instance, risks associated with fundraising and specifically knowing who is fundraising in your charity’s name are unique to the charity sector. There have been many publicised cases of bogus fundraisers supposedly collecting for legitimate charities.

But many fraud risks are common across all organisations. Cyber fraud is an obvious one where charities, like any organisations, can be innocent victims of external scammers. Charities may be viewed by cyber fraudsters as a weak link due to under investment in their IT infrastructure.

But charities can’t escape from the reality that they might also be de-frauded from the inside – by their own staff, trustees or volunteers. And when this does happen it is all too often the result of a culture of too much trust and too little accountability/internal control. Whether this is trustees not properly holding a CEO to account or the CEO placing too much trust in their finance manager. There are plenty of cases of both of these scenarios resulting in large financial losses for the charities concerned.

The biggest single action that a charity can take to prevent internal fraud is to get its culture right, to ensure all its people understand the purpose of control mechanisms and have assurance processes that demonstrate that these controls work in practice. Recruiting the right people is also important – but bear in mind that most fraudsters begin as perfectly honest individuals. They only turn to fraud when something changes that gives them the motivation – often changes in personal circumstances (gambling debts, divorces, business failures etc).  

Another potentially powerful high-level control is a fraud policy. This can act as a deterrent to potential fraudsters by demonstrating that you know where you might be vulnerable to fraud - that have your eye on the risks. It can also set the expectations around whistle-blowing (the most common way that frauds are uncovered) and make it clear how a charity will respond to allegations of fraud.

If your charity does fall victim to fraud there are some key steps to take. If it is an internal fraud then you must follow what you say in your fraud policy. If your policy says (which it should) that you will fully investigate and refer the matter to the police – then that is what you must do. Otherwise you are exposing yourselves to a repeat incident. If the alleged fraudster is a staff member you must also take immediate HR advice. One wrong step and your case against them can fall apart.

Finally, don’t forget your trustees’ responsibilities in terms of reporting to the Charity Commission under the serious incident reporting regime. The Commission continue to say that frauds are under-reported. You should refer to their guidance and take advice if necessary on the timing of a report.

Useful guidance for all charities is available on-line for free via the Fraud Advisory Panel at  https://www.fraudadvisorypanel.org/charity-fraud/resources/

Jonathan Orchard
Partner
Sayer Vincent LLP
Auditors and advisers to charities and social purpose organisations