Poor financial controls a factor in most insider frauds, says regulator

A Charity Commission report says that in 19 out of 20 insider fraud cases at charities 'the absence of appropriate controls was the primary enabling factor'

Insider fraud: lack of controls to blame
Insider fraud: lack of controls to blame

A lack of financial controls is a factor in the vast majority of insider frauds perpetrated against charities, research by the Charity Commission indicates.

A report published today by the regulator says that in 19 of 20 cases it examined in which charities had reported insider frauds or where information suggested they were at increased risk of insider fraud, "the absence of appropriate controls was the primary enabling factor".

The commission’s report says the findings are unexpected because a previous review it conducted in 2016 on a sample of fraud cases showed that controls were often in place but had not been consistently applied.

"Taken in combination, the two studies strongly suggest that trustees should ensure that counter fraud controls are both in place and being consistently applied," the report says. "Otherwise, charities are not adequately protected from harm."

The regulator also reviewed responses from 54 charities to a call for information about their experiences of insider fraud, alongside interviews with charities, sector organisations and counter-fraud professionals in a bid to identify good practice across the sector.

The commission’s review found specific examples of where weak or non-existent controls had enabled fraud to occur, including having only one signatory for bank transactions, one person counting cash collections or a failure to reconcile transactions and bank statements on a regular basis.

The regulator concludes that almost 70 per cent of insider frauds were enabled by charities because too much trust or responsibility was placed on one person, or there was a lack of challenge and oversight.

"Fundamentally, these are cultural issues which require a change in mindset and behaviour within charities, and this may take time," the report says.

"The first step in this process is to acknowledge that charities are no more or less susceptible to insider fraud than private or public sector organisations.

"Although the vast majority of trustees, employees and volunteers are honest and act with integrity, our research and supporting case studies reveal that without a strong counter-fraud culture and consistently applied controls any charity can fall victim to insider fraud."

The regulator also expresses concern in the report that 38 per cent of the charities in the second phase of the research said they had not reported insider fraud to Action Fraud or the police, and 43 per cent had not notified the commission.

"Timely reporting, involving full and frank disclosure, information-sharing and sector oversight are all vital tools in building a picture of insider fraud risk," the report says. "New and emerging trends can then be identified and the wider charity sector alerted to prevalent threats."

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