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Insider fraud in charities - managing the risk internally

Barry Dean Barry Dean

Charities can be particularly prone to insider fraud; that is fraud committed by trustees, employees and volunteers

Those working in the sector are committed to their particular charity’s aims and often believe that it is unthinkable that those working alongside them would rob their charity of much-needed funds. As a result, often too much faith and trust are placed in individuals and there is a lack of challenge to their actions.

Talking to charities who have suffered insider fraud, they have been devastated by the betrayal of trust which, as well as having a financial impact, can cause severe reputational damage. Those trustees and employees left to pick up the pieces can find it difficult to trust others again.

Three key steps

The risk facing smaller charities can be very different to those of larger charities, who have more employees, segregation of duties and more sophisticated governance, controls and procedures. When there is only a handful of people, segregation of duties and oversight is often very difficult to achieve.

In our experience, there are three key steps smaller charities can take:

1 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, for instance in a treasurer's role in a small charity, 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. Alternatively, you might wish to change a key position periodically so that one person, for instance, 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, as often it takes considerable courage to speak out. If your whistleblowing helpline is never called, you shouldn't assume that it is because everything is OK. It may be that your procedures are ineffective or the culture of your organisation discourages people from coming forward. 

2 Empowering your people. Make it clear that everyone in the charity should abide by the rules, from the chief executive down. Anybody who doesn’t follow procedures or controls should be challenged. Often a culture of deference allows senior employees to get away with things more junior employees would be challenged on.

3 Valuing your signature. If you are asked to approve, say, orders and payment of invoices, you should avoid just signing without checking. All too often senior employees will have signed off payments that later turn out to be fraudulent. Almost always they have done this because they either trusted the person who brought it to them or saw that someone else had also approved it and assumed everything was alright. Suspicion can then fall on an innocent individual. In any event, the reputational damage to the individual can lead to them losing their job.

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. 

To discuss insider fraud in more depth, contact Barry Dean

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