International Charity Fraud Week - Internal Fraud

The Charity Commission estimates that over one third of all identified fraud in charities is committed by staff, volunteers and trustees, and there may be much more that has not been uncovered.

As well as the financial impact, insider fraud can also be damaging to morale, staff retention and the charity’s reputation.

So how can charities spot fraud and what can they do to protect themselves?

Culture

Creating and maintaining an ethical culture in an organisation is fundamental. Charities need to assess their culture and ask themselves if it is conducive to identifying and preventing fraud. Are ‘dominant’ individuals appropriately managed? Does the charity have an effective whistle-blowing policy?

Charities will need to work hard to develop an open culture where all people feel comfortable about reporting potential issues.

People

Whilst the people in the organisation can be a fantastic asset, they can also be the greatest risk. Charities need to consider changes in behaviour or working patterns, changes in staff’s personal circumstances, whether staff become particularly defensive and staff not utilising their holiday entitlement. These can be indicators of internal fraud. Charities need to consider how they could identify and monitor these, and how staff can raise any concerns.

Systems & Controls
Charities can become overly dependent on few individuals. It is important for organisations to ensure they have sufficient segregation of duties, audit trail and approval processes.

Charities often fail to review and improve their control environment in line with organisational growth. Charities should regularly review their systems & controls processes to ensure they are sufficient to protect both the Charity and its employees.

Review and oversight

Do the board effectively review and oversee the operations. Do they receive regular financial information? Is there effective challenge to key members of staff? These are important points to consider for the board to ensure that issues are identified in a timely manner.

As charities invest more time in identifying their vulnerabilities, they will be better able to deter, prevent and detect insider frauds. A detailed risk register will help the Trustees identify their responses to identified fraud, so that they act in a timely and appropriate way, to minimise the financial and reputational risk.