Charity fraud – what should charities be doing to prevent it?

Estimates of the cost to the sector of charity fraud range from hundreds of millions of pounds to billions of pounds, and a recent report published by the Charity Commission, undertaken in partnership with the Fraud Advisory Partnership, suggests that one in every twenty five charities will suffer fraud in the next two years.

The report includes the results of a significant survey of charities about their experiences of charity fraud, identifying where further action needs to be taken and highlighting best practice.

What did the report find?

The new report contains some slightly alarming findings relating to fraud risk management, revealing that of the just over 3,000 charities that responded to the survey:

  • larger charities (particularly those that have suffered fraud) are more likely to acknowledge the risk of fraud, but only two thirds thought that fraud was a major risk for the sector;
  • less than a third had a whistle-blowing policy in place;
  • less than a tenth had a fraud awareness training programme in place; and
  • over a third thought that they were not vulnerable to any of the most common kinds of charity fraud.

The research also found that although fraud committed by staff has fallen significantly, fraud by trustees and volunteers has doubled.

Although two thirds of respondents said that fraud had resulted in some kind of adverse impact on the charity, reporting of fraud remained inconsistent with:

  • 89 per cent of frauds reported to the board of the charity;
  • 42 per cent of frauds reported to the police;
  • 29 per cent of frauds reported to the Charity Commission; and
  • a third not reporting the fraud to any external organisations.

Just under half of charities responding thought that the charity itself had contributed to the fraud occurring in some way, but, interestingly, nearly three quarters either changed their procedures or enhanced their internal controls to prevent any repetition of fraud.

What steps should charities take to protect themselves from fraud?

As a first step, the Commission wants charities to recognise the risk of fraud, and understand the damage that it can cause to both their funds and their reputations.

It also wants charities to focus on preventing fraud, rather than taking steps to prevent a repetition of fraud after they have fallen victim to it!

To try to prevent fraud, charities must recognise their vulnerability to the different types of fraud and make sure they:

  • Provide appropriate fraud awareness training in place for employees and volunteers so that everyone knows they have a part to play in fighting fraud, and update this regularly.
  • Put in place:
    • fraud prevention controls and reporting arrangements and
    • a whistle-blowing policy

and review such controls, and financial controls, regularly – more than eight in ten frauds are identified as a result of the application of financial controls at the charity, audit or whistle-blowing, so it is worth getting the basics right.

  • Seek to embed a culture of scrutiny and appropriate challenge – don’t rely on trust and goodwill to prevent fraud!
  • Talk about fraud openly and honestly, and report every fraud in a timely fashion to the police and charity’s regulators (including the Charity Commission as a serious incident) as appropriate.

More information from the Charity Commission on preventing charity fraud, as well as steps to take if fraud is discovered, can be found in its guidance “Protect your charity from fraud and cybercrime”.

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