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Fraud in charities

The National Fraud Authority’s  annual fraud indicator  shows that charities estimate they lose 1.7% of their annual income to fraud, which equates to £1.1bn of the sector’s income for 2010/11. Types of financial crime that charities are susceptible to include the falsification of grant applications, theft from cash collections, fake requests for donations, the misuse of charity bank accounts and false invoices or purchase orders. The Charity Commission’s own data also shows that fraud and theft made up the largest percentage of all reports of serious incidents made by trustees during the last financial year.

The impact of fraud and financial crime on charities, particularly smaller charities, can be significant, going beyond problems associated with the financial loss. These crimes cause distress to trustees, staff, volunteers and beneficiaries. They may damage the charity’s reputation and affect fundraising prospects.  Bad news about a single charity can detriment confidence in the sector as a whole. It’s important that trustees address incidents of fraud and financial crime responsibly and follow the guidance on reducing the risk of such events happening in the first place.

Trustees are legally responsible for ensuring charity funds are properly used. They must do all they reasonably can to prevent charitable assets from being used for criminal purposes. Strong financial controls, and good governance and management are key to minimising risks.

Eleven key steps to minimising the risk of fraud:

1. Critically review your financial controls at appropriate intervals, keeping them up-to-date.

2. Segregate duties – if possible don’t allow one person to follow through a transaction from initiation to conclusion.

3. Make sure all of the separate parts of the financial records agree with each other and always keep receipts.

4. Never weaken your financial security for the sake of saving time. Never pre-sign blank cheques, even where a second signature is required.

5. Keep a register of valuable fixed assets and property and inspect them periodically.

6. Ensure online banking arrangements are secure and protected with dual-level authorisation.

7. When recruiting staff, especially those who handle finances, make appropriate background checks and references.

8. If the charity makes grants to beneficiaries or other organisations, carry out appropriate due diligence checks on applicants.

9. Ensure you receive and consider regular reporting information about the charity’s finances.

10. If you suspect or become aware of fraud, make sure you know what to do and whom to inform. Prompt and appropriate action will help limit any damage.

11. Have your accounts subject to an external review by means of an audit (high level review) by a specialist charity auditor or independently examined (lower level review) by a specialist charity independent examiner.

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