The Charity Commission's proposal to scale back its investigatory function, announced in a report on its strategic review that was published in February, could pose a significant risk to the reputation of charities and the regulator itself, according to some charity lawyers.
The commission has proposed focusing its investigatory work on charities where there is a "serious and systemic risk". The proposal comes in the strategic review that was set up in response to a cut in its budget of more than a quarter from £29.3m in 2010/11 to £21.3m in 2014/15.
Andrew Studd, a partner at the law firm Russell-Cooke, says such a move would risk "more misappropriation of funds going unchallenged".
He also says that if a large number of small fraud cases came to light that had been undetected by the commission, it could have a more damaging effect on the public's confidence in charities than a single large, highly publicised misdemeanour.
"If it's a high-profile fraud, people might think 'these things happen', but little and often can reduce public confidence and have a great undermining influence," he says. "Niggles here and there; it can create a torrent."
Chris Priestley, a partner in the not-for-profit team of the law firm Withers Worldwide, says a policy of focusing on serious and systemic risk is accompanied by great reputational risks.
"The worry for the sector is that, if it gets out that the commission is stretched and that it is not able to investigate as thoroughly, that undermines confidence," he says.
But Priestley acknowledges that deciding which of the commission's operations should be scaled back is problematic, and that the serious and systemic risk proposals are a means of indicating to the sector that it should revise its assumptions about how investigatory responsibilities will be carried out in future. "How do you prioritise?" he asks. "It could be about the commission managing clients' expectations about how detailed and how quick their response will be."
Priestley says that the worst-case scenario for the commission would be failing to investigate a suspected fraud that was brought to its attention, and then finding that the fraud was proven.
Ros Harwood, a partner at the legal firm Dickinson Dees, believes concentrating on cases where there is serious and systemic risk means "there could be particular issues falling through the net". She says a reduction in the commission's investigatory responsibilities could encourage fraud.
She argues that "individuals prone to taking a risk will be more inclined to take a risk". She also says it is unclear what constitutes serious and systemic risk.
"I don't know whether the test will be objective or subjective - they'll probably look at it on a case-by-case basis," she says.
However, Harwood concedes that the commission is facing a difficult decision. "Where do you make the cuts? If you cut on the education and training side, trustees will be less aware of their responsibilities. If trustees are well trained, then the risk of serious and systemic risk should be reduced," she says.
According to a Charity Commission spokeswoman, more details about the new investigatory approach, including more insight into what constitutes serious and systemic risk, is expected to be published in the next month. She adds that the new regime is set to be implemented in October.