Accountants find huge gaps in charity procedures for fraud and financial abuse

Nick Brooks, who chaired the panel that investigated 25 charities, says few had anti-money laundering or bribery policies in place

Nick Brooks
Nick Brooks

Almost three-quarters of charities have gaps in their procedures for dealing with fraud and financial abuse, according to a report published yesterday.

Accountants who examined the financial controls and risk awareness of 25 charities with incomes of up to £5m found that 18 had flaws in their processes and four had "significant gaps" in this area.

The research was carried out by the Chartered Institute of Accountants for England and Wales and the Charity Commission, and the charities volunteered to take part.

Presenting the research at the commission’s public meeting in Birmingham yesterday, Nick Brooks, chair of the review panel, said fraud and financial management was the weakest area of the charities reviewed. "A lot of the charities had not got to grips with this at all," he said.

Brooks said very few charities had anti-money laundering or Bribery Act policies or policies to prevent or respond to fraud, but he was unsure whether the sample was reflective of charities in general.

Internal financial controls were one of the strongest areas, with 10 charities having strong controls, 12 some gaps and three significant gaps.

Most – 14 – had strong strategy and planning, with only two having significant gaps in this area.

Just over half – 13 – had strong controls for internal financial information and communication.

Brooks said that some small charities were producing income and expense management accounts but not balance sheets or cash-flow forecasts, which are especially important in a financial crisis.

All 25 accountants thought mergers were a "way forward", but none of the charities mentioned them at all, he said. "As a sector we need to develop a culture of mergers, collaborations and shared services," he said. A smaller number of charities would mean less competition for funding, trustees and volunteers, he added.

At the same meeting, Michelle Russell, the commission’s head of investigations and compliance, said the regulator had completed 236 fraud and financial abuse cases in 2011/12.

The cases were 16 per cent of the total of 1,472 cases it assessed, investigated or monitored last year.

Nearly one-third of the 1,027 serious incidents reported to the commission last year involved fraud or money laundering, worth a combined total of £10m, Russell said. Almost half of the 120 whistleblowing reports it received covered fraud.

Russell said a second stage of the commission’s charity fraud project, starting in the autumn, would look at grant and fundraising fraud, particularly in relation to street fundraising.

The Charity Finance Group will launch guidance on fraud prevention next week.

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