Excessive trust & lack of challenge enables majority of insider fraud in charities

Almost three quarters of insider fraud in charities is enabled by too much trust and too little challenge from others within the organisation, research by the Charity Commission has revealed. The study, published today, 26 April, found that cultural factors, such as placing excessive trust or responsibility in individuals, or the lack of internal challenge and oversight, contributed to 70% of insider frauds within a sample of charities analysed by the Commission. It shows that 43% of insider fraud was committed by by an employee, 33% by a trustee, 10% by a volunteer, and 10% ’other’, with 4% of those questioned not specifying. Contributing factors specified were: 43% of respondents suggested the prime factor was excessive trust or responsibility placed on one individual 24% due to a lack of challenge or oversight 24% due to either absence of controls or existing controls poorly applied 5% confirmed it was due to a combination of more than one factor Some specific examples of where weak or non-existent controls had enabled the fraud to occur include failure to reconcile transactions and bank statements on a regular basis, poor segregation of duties/ unclear responsibility for financial controls, having only one signatory for bank transaction, and only one individual counting cash collections. Respondents also highlighted the impact of insider fraud, which included detrimental impact on beneficiaries through reduced service provision, loss of funding/income, an adverse effect on the charity’s reputation, damage to team/organisational morale, and in one case, the charity had to close as a result. Actions taken by the charities surveyed were: 62% of charities who suffered a fraud reported it to Action Fraud or the police 57% reported the fraud to the Charity Commission 19% of frauds reported to the authorities resulted in a prosecution 38% recovered part or all of the money/assets taken 81% undertook a review of existing controls following the fraud 76% of the frauds prompted media coverage The Commission however voices concern in the study that 38% of cases were not reported to Action Fraud and 43% were not reported to the Commission. Michelle Russell, Director of Investigations, Monitoring and Enforcement at the Charity Commission, said: "Today’s report has confirmed what we already suspected from our casework in this area. The crucial lesson for charities isn’t about introducing lengthy counter-fraud policies. It’s about changing people’s behaviours and encouraging staff and all those involved in charities to be vigilant and speak out when things don’t seem right. This must be demonstrated by everyone in an organisation to be truly effective. "The vast majority of charity workers do incredible work but, as we’ve seen in some troubling cases recently, sadly charities aren’t immune to fraud. A dangerous combination of a lack of accountability and controls not being consistently applied can make any charity - big or small – vulnerable, and create opportunities for fraudsters that will have devastating effects." Over 50 responses were received in response to the Commission's call for information on insider fraud, with a third of responding charities having an income of over £1million. The study also identified that 19% of frauds reported to the authorities resulted in a prosecution, 38% recovered part or all of the money/assets taken, and 76% of the frauds prompted media coverage. The Commission has published advice for charities on improving resilience to fraud, as well as a number of anonymised case studies alongside the report.

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