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Charities and Third Sector

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Entrusted to defeat charity fraud

What should trustees be doing to quell the rising tide of fraud within charities?

Last updated: 21 Jul 2020 6 min read

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  • For 2017, fraud was estimated to have cost charities £2.3bn, up from 2016’s estimate of £1.9bn
  • According to the Charity Commission, a lack of appropriate controls was the main reason behind 19 out of 20 charity fraud cases in a 2018 study
  • Quickly acting in accordance with established anti-fraud procedures is a sound way to regain donor confidence, argue advisers

Charities are built on foundations of public trust and confidence. Fraud within a charity undermines that trust and inflicts huge reputational damage, but sadly it is a problem on the rise. The cost of fraud in the charity sector is estimated at £2.3bn in the latest Annual Fraud Indicator report by accountancy firm Crowe UK in partnership with the Centre for Counter Fraud Studies, £400m higher than in the 2016 report.

One of the most common types of abuse of charity funds, as highlighted recently in the media, is internal fraud, with the misuse of charity funds by staff, including senior executives, trustees and volunteers, ranging from putting in false expenses claims to making unauthorised payments to themselves.

To combat fraud effectively, charities need strong leadership and support from their board of trustees, the very people trusted by the public to manage and safeguard the organisation.

“All charity trustees are under a legal duty to manage the resources of their charity responsibly, ensuring their assets are protected, used appropriately and all accounted for,” says Dominik Opaliński, partner in the charities and social enterprise team at Hunters Solicitors. “This entails charity trustees exercising collective sound judgement and taking reasonable steps to develop practical and effective policies and procedures to identify and manage the full range and level of risk facing their charity.”

Ignorance is no excuse

Charity trustees are also volunteers who donate their time and effort without remuneration. “Legally, they have duties and responsibilities but, generally, trustees can be too trusting, which can extend to members of staff employed by the charity,” says Catherine Rustomji, partner in the charities and not for profit team at law firm Browne Jacobson. “Within this environment opportunities for internal fraud can go undetected.”

And for those trustees who are unaware of their responsibilities, ignorance is no excuse. “It is a legal requirement for trustees to receive appropriate induction and training in their role,” adds Rustomji. “Being a well-meaning amateur is not sufficient.”

In April 2018 the Charity Commission published a report outlining its study into insider fraud. The report analysed 20 charity fraud cases and found that in 19 cases an absence of appropriate controls was the primary enabling factor. This contrasts with their previous research, which found controls were usually in place to prevent fraud but were not always consistently applied.

Steve Harper, senior charities manager at accountancy firm haysmacintyre, highlights the importance of assessing the design and application of financial controls. He says: “Trustees should take appropriate steps in designing the control environment, such as agreeing authority limits for approving expenditure and making payments, to ensure the controls they set are followed. This could include approval of key documents by the trustees, internal audit or working with the external auditor.”

Should trustees be doing more to help mitigate the risk of internal fraud? Leon Ward, who has served as a trustee with global children’s charity Plan UK, and most recently trustee and deputy chair of the sexual health charity Brook, believes they should, but questions whether in reality they are able to.

“The question of how to enable trustees to do their job properly and fact check the financial information provided by the executive is a conundrum facing many charities. I don’t think there is any clear guidance on that”Leon Ward, trustee and deputy chair, Brook

“Any trustee is only as good as the information they are given by the executive,” says Ward. “If it is incorrect, unless you are logging into the bank account – and as volunteers, trustees are not operational in that sense – it is hard to track the finances in their truest sense. The question of how to enable trustees to do their job properly and fact check the financial information provided by the executive is a conundrum facing many charities. I don’t think there is any clear guidance on that.”

Get someone financially savvy on board

Ideally, a board of trustees should include at least one member with financial expertise. However, the heavy reliance on volunteers limits access to financial skills. Bringing in outside financial expertise not only addresses any potential skills gaps but also brings additional confidence and peace of mind to the organisation.

Bridget Whyte is chief executive of Music Mark, a UK association for music education and a charity. She says: “We are a membership organisation and our trustees are made up from the membership. They have all run music education organisations and bring a broad range of experience. When it comes to finance, charities have to hope that the person appointed treasurer is someone who really understands figures and what is required. I’m very lucky as in that respect my treasurer is fantastic. However, we also have an external financial consultant who provides excellent support with all the charity’s financial matters.

“We are a small organisation and we need to spend our members’ money well because they want to see a return on that investment. It is quite a responsibility to ensure that we are transparent, cost effective, so this is something we are constantly looking at and reviewing.”

Nevertheless, the risk of financial fraud in any charity organisation can never be completely ruled out. But best practice measures that include robust internal financial controls go a long way to managing the risk.

Establish anti-fraud guidelines

According to Nicola Sharp, senior associate solicitor at specialist business fraud firm Rahman Ravelli, all charities should implement an anti-fraud policy setting out the guidelines for identifying what it considers to be fraud, what the potential for fraud is in the organisation, how it should react to fraud allegations, and who should be responsible for preventing, detecting and reporting fraud.

“Nothing should be left to chance,” she says. “Fraud is often difficult to recognise and what may look suspicious could turn out to have a genuine explanation. Charities must have systems in place to ensure that any such suspicions are flagged up and acted upon as early as possible.”

Prevention by being proactive is always better than a cure. Opaliński adds: “Things still can and do go wrong, but what really matters to potential and existing donors is how trustees respond to put matters right: by acting quickly; following established procedure in accordance with best practice; informing those within and outside of the charity as quickly as possible; and taking steps to preserve all relevant evidence.”

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Charities and Third Sector