Who is stealing from your charity?
Helen Besant-Roberts considers the latest charity fraud statistics and offers some practical insights into making sure your charity is protected
KEY POINTS
- Charities are losing £1.3bn of their income to fraud
- They are exposed to internal fraud and external fraud
- Consider the ‘need’, ‘opportunity’ and ‘rationalisation’ triangle and how to break it
- Fraud risk awareness and anti-fraud programmes are vital precautions
Charities that believe fraud will never happen to them are in for a shock. For the first time this year, charity sector collaboration has enabled the National Fraud Authority (NFA) to provide an accurate estimate of how much fraud is really going on in the sector. A massive £1.3bn – 2.4 per cent of total charity incoming resources – disappeared last year, according to the NFA’s survey to which over 1000 charities responded. The latest report was published on 27 January 2011.1
Sam Younger, chief executive of the Charity Commission said: “We have previously said that fraud in charities has been under reported, which is reflected in today's report. However it also shows that instances of charity fraud remain low and the public can be assured that the vast majority of charitable money is going straight to good causes. Whilst no system can guarantee that any charity or business will be totally protected against loss, charity trustees must make sure that they have strong financial controls in place to protect their charities.”
Knock-on damage
The coalition government’s objective of reducing the deficit means that more and more focus is being placed on reducing corruption and fraud. This can be seen through new legislation, such as the Bribery Act which will force most organisations to address bribery and corruption whether it is regarded as a significant risk or not. The crackdown on fraud across government and public services is, according to Francis Maude, minister for the Cabinet Office, already delivering savings. But fraud has been, and continues to be, a serious risk for charities and often the reputational and financial damage is even more devastating. In one non-profit organisation, an audit of the financial records uncovered that the finance manager of five years had stolen over £100,000 of funds by diverting automated payments into his own bank account and then covering up the transactions. Although the organisation was insured, the reputational damage and the disruption caused by the ensuing investigation had a significant impact. Also, the people who worked with the culprit were devastated by what they perceived to be betrayal.
The recent Charity Commission regulatory case report of the London Philharmonic Orchestra was another reminder of the knock-on damage undetected fraud can wreak. In item 14 of the findings, the report reveals that £666,000 of the charity’s funds was stolen between June 2005 and August 2009. But the actual cost of the fraud was £2.1m because “the reports showed that the charity’s actual and expected income had been overstated and forecast expenditure understated in an attempt to conceal the fraud.” The false financial picture resulted in the charity incurring more cost than it would normally have done and, as a result, it had to use its reserves.2
Why charities are vulnerable?
Charities are particularly vulnerable to fraud because, typically:
- resources are limited resulting in reliance on key individuals and a lack of segregation of duties;
- they are full of volunteers and long-standing members of staff, many of whom are earning less than they would in the private sector;
- they rely on trust and goodwill more than the private sector;
- staff training may be less frequent or robust and there is often a reliance on untrained volunteers;
- they often deal with cash transactions; and
- they can be used as vehicles to commit fraud and may be unaware of what is being done in their name.
Regulatory support
Fraud is an area of growing focus for the Charity Commission and charities which fail to respond proactively to the risks associated with fraud will be under the spotlight. The Charity Commission undertook a compliance review in 2008/09 to consider how well charities were being run and a number of key concerns were raised as a result. One concern was around poor financial management including lack of internal controls, inadequate accounting and record keeping, and failure to submit accounts. The Commission is now focused on tackling these issues and concerns.
In 2010, the Charity Commission published a number of new codes and guidance papers emphasising their areas of concern. These included a new ‘Code of Good Governance’ and new ‘Risk Management Guidance’. In addition, the Commission published ‘Reporting Serious Incidents – Guidance for Trustees’.3 This clarifies trustees’ responsibilities for reporting serious incidents. It also details the definition of a serious incident which includes fraud and theft. The Commissions simple top tips for smaller charities on how to spot fraud are also an important routine checklist.4
Types of fraud
Unlike most commercial organisations, charities face fraud from two sides; internal fraud committed by staff, trustees and volunteers, and external fraud committed by outsiders taking advantage of the generosity and benevolence of charities and their donors.
The most common types of fraud in the sector are theft of cash and cheques, theft of inventory, credit card fraud, identity fraud and fraudulent financial reporting.
No-one likes to believe that anyone working within the organisation could commit fraud but, unfortunately, there are many instances where this is case. Recently, the finance manager of Rathbone, a Manchester-based charity, was jailed after stealing nearly £500,000 from the charity over a 10-year period.
However, for all the high profile cases, there are many more cases of staff and volunteers committing ‘minor’ fraud such as inflating expense claims or ‘borrowing’ small amounts of petty cash.
Managers and trustees of charities may commit fraud which does not result in personal gain. For example, financial records may be manipulated to assist the charity in obtaining funding or to ensure favourable reports are made to stakeholders. Those who commit such frauds may believe they are doing it for the greater good but it is still fraud.
External fraud and the use of charitable scams are rife, particularly in this age of electronic communication. One charity published its bank details on its website to enable donors to make donations more readily. Unfortunately, this trust was abused by unscrupulous fraudsters who used the information to steal funds from the charity.
Very recently, three members of the same family were found guilty of defrauding several large charities out of more than £500,000 by applying for funds for spurious projects.
Understanding fraud
There are three conditions required for someone to commit fraud: need, opportunity and rationalisation. This is known as the fraud triangle. If one or more of the conditions is removed, the risk of fraud is reduced.
Need
People with financial problems are more likely to steal, as are people with drug, alcohol and gambling problems, and people having extra marital affairs. Staff can also feel the need to commit fraud to disguise incompetence.
Management or trustees may also be under pressure to commit fraud, such as false accounting or misuse of funds, because of a need to meet the expectations of funding bodies, beneficiaries, regulators or other stakeholders.
Opportunity
The easier it is to commit fraud, the more likely it is to happen. If the charity has weak internal controls such as poor IT access restrictions, a lack of segregation of duties or does not have oversight or review procedures, then fraud may go undetected.
The opportunities for fraud or theft also increase where charities hold cash or have high-value, readily moveable assets which can be misappropriated.
In a survey conducted by the Fraud Advisory Panel, 53 per cent of charities which had experienced fraud believed that they contributed to the fraud, either by being too trusting, having inadequate systems or due to a lack of physical security.
Rationalisation
Those who commit fraud are always able to justify it to themselves using psychological rationalisations such as “I will pay it back”, “I work hard and I have earned it”, “everyone else is doing it”, or “no one is hurt by it”. Rationalisations can change over time. The experiences of individuals found guilty of fraud show that they often start with the intention to repay funds. However, as the fraud escalates, the rationalisation changes.
Protecting against fraud
Interestingly, 33 per cent of reported fraud is identified through whistle-blowing and tip-offs; 15 per cent is identified by management, 15 per cent by audit and 12 per cent by accident. A far greater amount goes undetected.
One way to protect against fraud is to look out for the warning signs, such as:
- changes in the behaviour of employees or volunteers;
- new staff resigning quickly;
- an increase in the number of complaints being made;
- transactions taking place at unusual times or not being recorded on a timely basis;
- discrepancies in accounting records;
- unexplained items on reconciliations;
- missing documentation; and
- missing funds or assets.
More and more emphasis is being placed on fraud risk management to reduce the risk and to mitigate the impact of fraud. In the Charity Commission’s recently updated ‘Risk Management Guidance (CC26), fraud risk is included as a separate section.5
The most effective way to deal with fraud is to develop an anti-fraud programme appropriate and proportionate to the charity. Areas to be considered within the anti-fraud programme include:
- fraud risk management;
- anti-corruption policies and procedures;
- fraud training for all staff and volunteers;
- robust financial controls;
- whistle-blowing policies;
- theft insurance;
- segregation of duties and authorisation limits; and
- robust recruitment and screening procedures.
To protect against fraud, charities should take an holistic approach. Fraud awareness should be integrated throughout the organisation; from a culture of zero tolerance at the top, through the setting of values and policies, down to training and monitoring procedures.
A fundamental element of fraud mitigation is internal control. Obviously, the more controls in place, the better the mitigation. However, it is important that the system of internal control is commensurate to the risk otherwise the system becomes cumbersome and inefficient. Also, controls are only as good as they are robust; if they can be readily circumvented, then they are not effective.
Examples of internal controls include preventative controls such as access restrictions, segregation of duties and screening of job applicants. Detective controls include reviews, reconciliations, monitoring and reporting and audits.6
Benefits
The benefits of an effective anti-fraud programme cannot be understated. These include:
- reduced risk and impact (financial and reputational) of fraud or error;
- less disruption dealing with fraud or error after the fact;
- greater likelihood of achieving charitable objectives;
- early warning of problems;
- better decision making;
- better allocation of finite resources;
- more effective communication with stakeholders; and
- effective continuity planning.
Raincheck your procedures
Whilst no organisation can have a cast iron system to protect against fraud, observation of the basic precautions set out in Figure 1 can go a long way to make sure your income is funding what it was put there to fund – the needs of your beneficiaries rather than lining criminal pockets.
1. www.attorneygeneral.gov.uk/nfa/ WhatAreWeSaying/NewsRelease/Pages/fraud-costs-the-UK-over-38billion.aspx
2. www.charitycommission.gov.uk/ Library/rcr_london_philharmonic.pdf
3. www.charity-commission.gov.uk/Our_ regulatory_activity/Reporting_issues/rsinotes.aspx
4. www.charitycommission.gov.uk/RSS/ News/pr_nfa.aspx
5. www.charitycommission.gov.uk/Publications/cc26.aspx
6. See also CFDG’s article ‘Inside job’ in Caritas, issue 20 July 2009.
Author: Helen Besant-Roberts
Helen Besant-Roberts is a partner within the business services team at accountancy firm, Hurst.
She has extensive audit, due diligence and compliance experience and is responsible for a portfolio of clients including many charities, social enterprises and non-profit clients, several large privately-owned groups and subsidiaries of international groups.
Click here for other articles written by Helen Besant-Roberts
There are no comments on this article. Be the first to comment.