Small charities must not rely on trust to avoid insider fraud

As part of Charity Fraud Awareness Week 2018, Regan wrote the following article for Third Sector magazine about how a lack of scrutiny of senior management by trustees can facilitate insider fraud, with potentially serious consequences – particularly for smaller charities.

Screengrab of Regan's article in Third Sector Magazine

Charity fraud is a serious problem, costing the sector up to £2.3 billion each year. Fraud committed by someone within the organisation – insider fraud – accounts for a significant proportion of this cost, with more than a third of incidents reported in 2015/16 involving staff, trustees or volunteers.

In April this year, a report published by the Charity Commission found that the majority of insider fraud at charities is enabled by ‘excessive trust and lack of challenge from others within the charity’.

This lack of scrutiny can be a particular problem in small charities, where boards are more likely to rely on the goodwill of senior managers to ‘do the right thing’, resources to distribute financial responsibility among staff are lacking, and a more relaxed approach can lead to financial controls being routinely waived. However, it is these smaller charities for whom the consequences of insider fraud, in terms of both finances and reputation, can be most devastating.

In 2017, the former chief executive of Birmingham Dogs Home, Simon Price, was jailed after stealing £900,000 from the charity. His former partner, who had worked as the charity’s commercial manager, received a suspended jail sentence for her part in the fraud.

In handing down the sentences, the judge acknowledged not only the direct financial effects of the fraud, but also the impact on the charity’s longer-term income as a result of damage to its reputation. This impact is not just a theoretical one – research shows that a loss of reputation discourages donors and funders alike.

Fortunately for Birmingham Dogs Home, a large proportion of the stolen money was able to be returned, as Price had used much of it to fund a gambling addiction. In cases where stolen money has been spent on consumables, recovery is usually extremely difficult – in this case the money was recovered from the gambling company, which had failed to conduct the required checks on the source of the cash Price had used.

As a relatively large charity with an annual income of over £1 million, Birmingham Dogs Home survived the fraud revelations despite the inevitable impact on its bottom line. However, it is likely that a smaller charity would have floundered.

Trustees of smaller charities can minimise the risk of insider fraud by implementing some simple measures.

  • Having an anti-fraud policy in place ensures that all staff are clear on what constitutes fraud, as well as what to do when it is suspected. Guidance for producing a fraud policy is available from the Fraud Advisory Panel.
  • Developing a culture of ethical behaviour can encourage honesty and fairness, and promote the idea that everyone in the organisation is responsible for stopping fraud – not just trustees or finance people.
  • Implementing robust financial controls, including segregation of financial duties and regular recording of income and expenditure, reduces opportunity (and therefore temptation) for potential fraudsters. It is important that both senior staff and trustees adhere to these controls at all times, with no ‘special privileges’ for anyone.

The relative simplicity of these measures means that there is no excuse for charities to let their turnover dictate the level of scrutiny under which their managers operate. Preventing insider fraud is vital in ensuring a secure future, and in doing so, upholding the responsibility that every charity, regardless of size, has to its supporters, its beneficiaries and its staff.

This article was first published in Third Sector magazine – the original piece can be found online here.

For more information on matters involving insider fraud, please contact Regan or Gemma at at info@reganpeggs.com, or call 0121 201 3765.

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