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1 in 10 charities detected fraud in last year

Monday 10th June 2013

Independent regulator for charities in England Wales, the Charity Commission, wants charities to better protect themselves against fraud and financial crime, in response to the National Fraud Authority's (NFA) latest report.

This year's Annual Fraud Indicator sampled charities with income over £100,000 only, increasing the number of larger income charities in the sample.

However this is not to imply that smaller charities do not experience fraud, as we know they do. It is vital that all charities, whatever their size, do not become complacent and ensure they have financial controls and policies in place to both prevent fraud occurring, and deal with it when it does happen.

The NFA's Annual Fraud Indicator shows that:

* Nearly 1 in 10 (9.1%) charities with an income of over £100,000 reported that they had detected fraud in the last financial year (2011/12);
* The most common types of fraud were highlighted as payment and banking fraud (47%), accounting fraud (14.8%) and identity fraud (14.1%);
* 1599 charities completed the survey, and of the 9.2% that were a victim of fraud, almost a quarter (23.1%) said they had suffered insider-enabled fraud.

Fraud affects all areas of the economy and as these findings show, charities are not immune. Charity trustees are responsible for ensuring a charity's funds are used properly, and for taking steps to prevent assets being abused. However, only a fifth of respondents (21%) said they had attempted to measure their fraud loss in the last financial year. This figure supports the Commission's recent review project with the Institute of Chartered Accountants in England and Wales (ICAEW), which gave 25 charities with income less than £5million the opportunity to participate in a free review of financial controls and risk awareness.

The ICAEW report found a general weakness in charities' fraud prevention policies, and a need to raise awareness among smaller charities of risk and risk management. Trustees also had gaps in their financial understanding and financial management skills.

The Charity Commission aims to help charities protect themselves, and a wide range of guidance can be found on its  website, including the Compliance toolkit (chapter 3) and its summary strategy for dealing with fraud and financial crime. The strategy emphasises prevention, as well as cooperation with the sector and other government agencies to detect, deter and disrupt fraud in charities.

The Commission chairs a multi-agency Voluntary Sector Fraud Group, which promotes greater awareness of fraud risks and identifies good practice initiatives. Although it is for the police to investigate and prosecute fraud, the Charity Commission's role in individual cases is to establish how criminal matters arose and whether the trustees have responded appropriately. Where necessary the Commission will intervene to ensure charity funds are protected and the trustees have put in place steps to help ensure it does not happen again.
Sam Younger, Chief Executive of the Charity Commission, said: "The Annual Fraud Indicator highlights that fraud is an issue across all sectors, and charities are no exception. While smaller charities may sometimes feel this is not an issue they need to worry about, trustees have a responsibility to ensure proportionate anti-fraud measures are put in place.

"It's worrying that almost a quarter of those who have been victims of fraud have suffered insider-enabled fraud, and this is a timely reminder that it does happen and it's not always outsiders who are the culprits. Trustees, staff and volunteers are the people on the ground who could help stop the opportunities for fraudsters by putting some financial risk measures in place. There should be a culture of counter fraud and risk management created by the trustees and, in larger charities, senior management, who should lead by example in adhering to the charity's internal financial controls and good practice."

Alex Swallow, Chief Executive of the Small Charities Coalition, which is part of the Charity Fraud Steering Group, said: "Fraud can affect all charities, however large or small they are.

"Although discussing fraud and putting in measures to help prevent it may seem like a difficult conversation for any charity to have, let alone a small one, being clued-up in this area should be seen as a positive thing. It will help minimise your risk, enhance the sustainability of your organisation and potentially make you more attractive to funders and supporters who will see that you take this important area seriously. Sadly, instances of fraud erode the trust that the public has in all charities, not just in those where it occurs, so this is an issue that it is important for us to pull together on."

Caron Bradshaw, CEO of the Charity Finance Group, said: "Putting anti-fraud measures in place and enforcing these is absolutely critical for all charities, regardless of size. The high levels of trust, use of volunteers and reliance on one or only a few people to deal with finances can all present opportunities for fraudsters. Trust within the charity sector is an excellent thing, however trust should always be supported with controls: the two are not mutually exclusive. Actively applying controls means questions can be asked freely and without fear.

"This year the NFA has revised the methodology and the AFI figure has dropped significantly. Far from being a sign we should rest on our laurels, this demonstrates the challenge and complexity of detecting and monitoring fraud - ultimately so much of what we experience is undetected. It is, therefore, our responsibility as a sector to ensure we are all scrutinising our steps to prevent and manage the risk of fraud, and seeing what we can do better."

Tips for smaller charities:

1 Find out the identity and legitimacy of any organisation the charity works with;
2 Instil good financial controls and policies governing access, use and storage of electronic information;
3 Get safe online: put anti-virus systems, firewalls and policies governing electronic information in place;
4 Have regard to, and apply, sound trustee "owned" governance principles;
5 Train your staff and volunteers so they know how to report suspicions;
6 Find out what other trustees and staff are doing - it's not rude to question what's going on;
7 Report concerns to the relevant authorities, such as Action Fraud;
8 Assess the proportionality of risk controls in relation to the size of your charity;
9 Understand the charity's structure, activities and area of operation that could affect risks;
10 Develop a financial records system for both the receipt and use of all funds.

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George Bailey

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