Looking closer to home, preventing insider fraud in charities

The aim of almost all Charities and not for profit organizations is to be of benefit to those around them. However, when organisations rely on a small number of staff or volunteers to run day-to-day operations, control and oversight are not always what they should be. There is no doubt that those working in the charitable and not for profit sector are committed to ensuring their particular organisations aims are achieved and often consider it preposterous that those they work side by side with would rob the organisation of much needed funds. This results in often too much faith and trust being placed in individuals and a lack of challenge to their actions and presents serious risks for trustees who have a legal duty to safeguard the charity’s assets.

Attitudes to fraud are almost always set by the tone at the top. Unless you make clear the standards that you expect, you cannot expect volunteers and staff to adhere to them.

Training and development

When first appointed it is not unusual that a new trustee may not have all the knowledge and skills needed to carry out their regulatory duties effectively. Therefore induction and training are very important, followed closely by continuous education and development. The regulatory environment is facing a period of change with increased focus on the governance of charitable organisations and as a result a trustee’s learning is never complete. A policy of lifelong learning and keeping the knowledge and skills required up to date are part and parcel of protecting your organisation.

There are a number of resources that can assist with keeping you up to date. For example, guidance on internal financial controls is available from the Charity Commission in the UK while in the Republic of Ireland, the Charities Regulator has published guidance for trustees of small to medium sized charities on developing and implementing internal financial controls within their charity. Attending seminars and briefings and networking with other not-for-profit organisations are also useful ways to update your knowledge.

Risk assessment

Risk assessment is another important consideration. Focus on where the fraud opportunities in your organisation are. Assess these risks and consider what improvements, if any, you need to implement in your systems. The risks facing smaller charities can be very different to those of a larger organisation, who have more sophisticated governance and the ability to implement segregation of duties. Where there is only a handful of people the latter is often very difficult to achieve, however in our experience there are three key practical steps smaller charities can implement to protect against potential fraudsters:

1. Multiple signatories - make sure there are always two signatories on bank transactions, including transfers and cheques. Those two signatories should, ideally, not be related to one another. For instance, not a spouse or close relative.
2. Where segregation of duties is not always possible, make sure there is some rotation of duties. That might mean that when a person goes on holiday, someone else fully takes over their role. Or alternatively, change a key position periodically to ensure that one person, does not do all the bookkeeping for the charity for an extended period of time.
3. Someone other than the bookkeeper should prepare the annual accounts. A second pair of eyes might either spot or deter someone else from doing something they should not.

For larger charities, the three things which are really important are:

1. Having an effective whistleblowing procedure. A large proportion of frauds are uncovered by someone speaking up. Whistleblowing procedures should be well publicised within your charity. Those who raise concerns should be protected and encouraged.
2. Empowering your people. Make it clear that everyone in the organization should abide by the rules, from the chief executive down. Anybody who doesn’t follow procedures or controls should be challenged.
3. Valuing your signature. If you are asked to approve payments or invoices, you should avoid just signing without checking.

What to do if you suspect fraud

Unfortunately charities being victims of fraud is an all too common occurrence. Charities should be vigilant, put trust in people – but not blind trust and individuals should speak up if you think what you see is not right. 

If you suspect fraud is occurring, it’s a good idea to get professional advice promptly as the way that you deal with the situation can affect your long-term reputation as well as your ability to recover losses.