Fraud in the Not for Profit sector and the recession

Is the sector particularly exposed to the risk of fraud or, on the other hand, do charity staff and volunteers justify the trust with which they are treated? There is considerable concern that the incidence of fraud will rise as a result of the increased financial pressures individuals are under – but how is the sector placed? 

The Institute of Chartered Accountants has issued guidance as to the implications of the recession for the potential of fraud, and also commissioned a report on fraud in the charitable sector. 

At the same time the Charity Commission reports that 50% of charities have suffered financially because of the recession. The additional threat of fraud in the recession is that previously honest staff members, trustees and contractors may face severe financial pressure. Suppliers’ credit lines may not be renewed and the down turn in economic activity will often mean that overhead costs are not covered. Staff overtime is reduced, and trustees or staff members’ partners may have been made redundant or seen their remuneration package cut. With this new situation the incidence of ‘desperation fraud’ will increase. Those responsible for governance are prompted to review their organisation’s anti-fraud policies and are warned of the risk of misplaced trust. Against this trust is often a key factor in the effectiveness of charities.

Report into charity fraud 

The report into charity fraud found that of over 1,000 charities responding to the survey, 7% of the charities had suffered fraud in the last two years. The monies lost were considered to be low and the overall incidence substantially less than the ‘private sector’. Of course the research could not quantify the amount of unidentified fraud that had taken place or was still taking place! Half of those suffering fraud thought that better controls would have prevented the fraud being committed. 28% of fraud involved people handling cash, 23% cheques and only 5% on line payments. 51% reported the fraud to the police whilst only 10% to the Charity Commission. Most charities did not have a proper anti-fraud strategy or a fraud response plan. 

The report went on to state that respondents to the survey perceived charities as being vulnerable to fraud because there is a presumption of trust and goodwill, not so present in the commercial sector. Unethical people can exploit this. 

The occurence of fraud 

A common view is that the occurrence of fraud is an interaction of the forces of opportunity (and chance of ‘getting away with it’), the potential reward if successful and the pressure on and attitude of the individual considering committing the fraud.

Opportunity arises if there are weak procedures and financial controls.

The rewards of fraud will be balanced by the potential perpetrator who may consider them to be insignificant compared with the damage to career, etc if discovered. 

The pressure on individuals from their personal situation may result in previously honest staff, Board members or contractors to become dishonest. This will increase in the recession. 

A disgruntled individual will often rationalise fraud as being the recompense of amounts (s)/he was entitled to. An example of this is where a member of staff works substantial unpaid overtime or a Board member spends excessive time and ‘borrows’ money for a taxi home or a meal. This can be the first step towards larger irregularities.

In the event of an organisation suffering fraud there is a loss of reputation and morale in addition to the financial loss. Frequently the cost of repairing the reputation by instituting an independent enquiry can far exceed the damage of the loss and of course the time taken can be very onerous. 

Practical measures to reduce vulnerability to fraud

• Designate a Board member or senior member of staff to be responsible for the anti-fraud policy and to supervise an annual review of risk. Institute or review a whistle-blowing procedure. Putting a duty on staff to report such matters has the additional advantage of reducing the chance of a claim from a disgruntled staff member that they were discriminated against for raising an issue.
• Establish and regularly update a register of Board and senior staff members’ interests in contracts and record of gifts and entertainment.
• Have a clear staff and board expense policy to ensure that a person at a higher level approves expense claims. A Board member’s claim should be approved by another Board officer.
• Check references for all new staff including a follow up check by telephone. A ‘Google’ search may give interesting information if the application is for a senior post.
• Review authorisation procedures – the person authorising a payment must be in a position to know that a service has been provided or goods been delivered or at least the invoice has already been approved by a person who should know.   
• Review internet banking procedures to ensure that these are as safe as procedures for cheque signing.
• Ensure regular bank reconciliations are carried out and reviewed at a higher level including an examination of the bank statements.
• Establish a procedure for the writing off of old debts and the issuing of credit notes.
• Minimise the use of cash by reducing the use of petty cash and looking for alternative ways to collect income.
• Maintain a fixed assets register.
• Ensure staff have a regular contact or appraisal meeting, so that grievances can be addressed.
  • Availability to staff of a confidential advice service to be used in the event of personal financial problems.

The Charity Commission have given guidance on this area particularly in their publication CC8 Internal Financial Controls for Charities. This is of course of relevance to other organisations in the Not for Profit sector.

Contact us

Over the years we have had extensive experience of clients suffering fraud. Should you wish to discuss this further, please contact a member of our Not for Profit sector team or send us an enquiry online.