Reducing the risk of internal fraud in charities

Fraud within charities is, unfortunately, more common than we would like to believe. Each year the ‘Charity Fraud Awareness Week’ campaign aims to raise awareness and share good practice within the sector, as exposure to fraud can leave a charity open to potential loss of monies as well as damage their reputation and any future funding.

Fraud comes in many forms, but insider fraud is perhaps the most dangerous to charities. Although the majority of those involved in charity work are genuine, charities who place too much trust and responsibility in one individual, or do not challenge their processes, are more vulnerable to internal fraud.

Examples of internal fraud are:

• Creating payments to a fake supplier or employee
• Unauthorised access to the charity bank account, allowing non-charity related payments to be made
• Overpayments being made for goods or services

In order to reduce the risk of internal fraud, the culture of the organisation should be one of transparency and openness. Charity trustees should understand the risks of fraud applicable to their charity and put processes in place to manage these risks.

Examples of internal controls which reduce the likelihood of insider fraud are:

• Developing an anti-fraud policy
• Encouraging communication regarding anything suspicious
• Reviewing accounts and budgets and investigating any unexpected variances
• Ensuring that all trustees have an understanding of the charity financial records, not just the treasurer.
• Separating duties so that no single person has responsibility for financial transactions
• Ensuring adequate documentation of financial procedures
• Where at all possible, avoiding the use of cash and instead using online transfers and cheques which are more easily traceable.

Whilst you can’t completely eliminate the risk of fraud occurring, being prepared and implementing good internal controls can lessen the risk of your charity falling victim to fraud and can reduce the impact of any fraudulent activity.

If you believe your charity has fallen victim to fraudulent activity, you should immediately report this to Police Scotland via their 101 non-emergency number and notify OSCR by filing a “Notifiable Event”. For further help and support in reducing the risk of fraud in your charity, you can refer to the OSCR Fraud Guidance PDF.

Acting quickly can minimise the impact of fraud and can increase the legal options you can take. If you wish to discuss how to identify suitable anti-fraud controls/procedures and how to reduce the likelihood of fraud occurring within charities, please contact a member of our EQ Charities team at charities@eqaccountants.co.uk or call one of our offices.