The Charity Commission is running its annual Fraud Awareness Week and today it is focusing on insider fraud. 

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 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. 

When we have talked to charities who have suffered insider fraud, they are 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.

The risk facing smaller charities can very different to those of larger charities, who have more staff, 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; and
  3. someone different to 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, from my experience of investigating many frauds, the three things which are really important are: 

  1. having an effective whistleblowing procedure.  Around 80% of the frauds that I have seen have been uncovered by someone speaking up.  Whistleblowing procedures should be well publicised and those who raise concerns should be protected and celebrated as often it takes considerable courage to speak out.  If your whistleblowing helpline is never called, don’t assume that is because everything is okay – it may be that your procedures are ineffective or the culture of your organisation discourages people to come forwards; 
  2. empowering your people.  Make it clear that everyone in the charity should obey the rules, from the Chief Executive down.  Anybody who doesn’t follow procedures or controls should be challenged by even the most junior of your staff.  Often a culture of deference allows senior staff to get away with things more junior staff would be pulled up for; 
  3. valuing your signature.  If you are asked to approve, say, orders and payment of invoices, don’t just sign without checking.  All too often we have spoken to senior staff who 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 that they also have also been involved in the fraud.  In any event, the reputational damage to the individual can lead to them losing their job. 

Unfortunately, the Charity Commission run their fraud awareness week because charities are victims of fraud, so for those within the sector it is wise to by vigilant, put trust in people – but not blind trust and speak up if you think what you see is not right.