Don Bawtree: Charities are not immune to fraud

Also: trustee effectiveness; social investment's performance in the UK; and audit guidance reissued

Don Bawtree
Don Bawtree

The Charity Commission has issued more guidance on fraud. It points out that, like any other sector, charities are not immune to criminal abuse from fraudsters. Fraud poses a serious risk to valuable funds and sensitive data, and can damage the good reputation of charities, affecting public trust and confidence in the sector as a whole.

It is true that some charities are more exposed than others to this sort of risk. In the past few weeks, every charity I've met has been subject to some sort of phishing, but others are more vulnerable. The Charity Commission recognises that some charities, such as shops or trading outlets, have a higher risk of financial loss or falling victim to fraud because of the nature of their activities.

The Charity Commission’s compliance toolkit is a good place to start in thinking about how to respond to this risk, as well as its guidance on internal financial controls (CC8). Other suggestions from the regulator include ensuring strong financial management and good governance, and putting in place financial controls that are applied robustly. If all else fails, I always suggest that charities have a well thought-through fraud response plan. You cannot completely test this, but doing a mock response exercise might be a worthwhile way to spend a quiet afternoon in January.

Trustee skills

If good governance is part of fraud prevention, then the Charity Commission can take some heart from the Taken on Trust report, looking at the awareness and effectiveness of trustees. The report reassures everyone that trustees do generally recognise the importance of the twin threats of fraudulent behaviour and cyber fraud. This pattern is repeated across all sizes of charity. However, more than a third of smaller charities are not sure that they have adequate measures in place to prevent or cope with fraud. Larger charities are more convinced that they have appropriate processes. The same pattern applies to cyber fraud. Because of the speed with which this threat develops, trustees can never afford to be complacent.

Meanwhile, the same report says that the need for trustee skills in finance appears to be better met in most charities. Across all sizes of charity, apart from the very smallest, more than three-quarters felt that finance skills were sufficient for their organisation.

Audit

The Financial Reporting Council has reissued the guidance practice note for charity auditors – PN11. Although this is a good read for the audit firms, trustees should also be aware of it. The good news is that it is much shorter than the previous version; the bad news is that the reader is expected to have a good knowledge of international audit standards before they start. Topics that charities might want to be aware of include: ensuring that the auditors do actually understand charities; understanding the requirements for reporting to the regulators; understanding what the auditor will do in relation to annual reports; and considering whether any of the issues listed as giving rise to a potential mis-statement apply. Although there is no official effective date for a practice note, it comes into force immediately, so it will certainly affect charities with an upcoming December year-end.

Social investment

It was sad to read a report produced by an independent group set up by the government stating that the UK is now failing to keep pace in enabling individuals to make social impact investments, despite the availability of exceptional skills, competence and the entrepreneurial drive to build on an impressive track record of innovation. The report does not mention the role of charities, but of course they can attract social investment, as some recent bond issues have shown, and as the recent changes to social investment tax relief encourage. The report emphasises that there is no lack of demand, especially with younger savers. Some recommendations are addressed to regulators – sadly, the UK charity regulators are not included.

Don Bawtree is lead partner for charities at accountants BDO LLP

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