“But we trusted them!” Insider fraud – the threat within

All charities, irrespective of size, will likely suffer from fraud and/or corruption at some point. But recent Charity Commission research revealed particularly frightening figures: 43% of fraud in charities is committed by an employee, 33% by a trustee and 10% by a volunteer.

With the fraudster usually having a deep understanding of the organisation’s controls and anti-fraud capability, this can be devastating. Not only in terms of morale and reputation, but the financial losses can also be huge. In the Commission’s research, 43% of respondents stated the main reason for the fraud was excessive trust or responsibility placed on one individual; 24% due to the lack of challenge or oversight; and 24% due to either absence of controls or existing controls being poorly applied. Fundamentally, these are cultural issues which require a change in mind-set and behaviour and this can take time. 

Create a counter fraud culture
Despite the figures, the vast majority of trustees, employees and volunteers are honest and act with integrity. But without a strong counter fraud culture and consistently applied controls, any charity can easily fall victim to insider fraud. Many of the problems are driven by a poor anti-fraud culture, in which the risk of fraud is not given the proper attention and priority.

A strong culture is pivotal, starting with the tone at the top of the organisation. Everyone should be involved in reducing the risk of fraud. This can be achieved through a comprehensive fraud strategy which includes a clear work-plan of training, communications and risk identification. An effective counter fraud culture should encourage and facilitate challenge. This can range from insisting original receipts are presented before payments are released, through to seeking solid monitoring and assurance that charity funds have been spent on the contracted/commissioned projects. 

It’s often behaviours (whether personal or through results or documentation) that should act as a ‘red-flag’. To help spot these flags, staff should be trained in understanding what fraud is, how it manifests itself and how to report concerns through your organisation’s whistleblowing/processes. Anyone (whether internal or external) should feel confident raising any concerns they have about fraud.

Embed the culture across all areas
All aspects of fraud risk reduction should be adopted, ranging from undertaking robust pre-employment screening for job applicants, through to undertaking enhanced due diligence on would-be partners, suppliers and grant recipients. Whilst there are significant advances in IT-related fraud intervention, simple controls such as segregation of duties and proper checking are often overlooked, so don’t forget to go back to basics too. None of which is ‘rocket-science’ nor prohibitively expensive. All too often, we hear the words “we trusted them!” being uttered at the investigation de-brief stage with the client. It’s vital to remember that ‘trust’ is not a control and you cannot rely on it. Good governance, developed through robust policies and strong financial controls, should be in place and clearly demonstrated. 

Adopting best practice and taking a proactive, rather than reactive, approach to fraud will go a long way to reduce the likelihood of becoming a victim of fraud. Please ensure you participate in the forthcoming Charities Against Fraud Awards 2018, either by entering the awards with your charity’s counter fraud initiative or by joining us on 22 October for the announcement of the winners and to hear their success stories in the fight against fraud in the charity sector.   

Key dates for the diary:
• Entry deadline: 28 September 2018
• Shortlist announcement: 8 October 2018
• Awards ceremony: 22 October 2018

Go to www.moorestephens.co.uk/sectors/charities/charities-against-fraud-awards to submit your entry or follow us on Twitter @MooreStephensUK or LinkedIn for updates.

#CharityFraudOut #CharitiesAgainstFraudAwards2018

For more information about how we can help you create a counter fraud culture to help prevent fraud at your charity, contact your usual Moore Stephens adviser or our counter fraud specialist, John Baker.

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