Regan Peggs: Small charities must not rely on trust to avoid insider fraud

The first in a series of articles to mark Charity Fraud Awareness Week

Regan Peggs
Regan Peggs

As part of Charity Fraud Awarenesss Week, Third Sector has commissioned a number of articles from third-party contributors

A lack of scrutiny of senior management by trustees can facilitate insider fraud, with potentially serious consequences – particularly for smaller charities.

Charity fraud is a serious problem, costing the sector up to £2.3b a year. Fraud committed by someone within an organisation – insider fraud – accounts for a significant proportion of this cost, with more than a third of incidents reported in 2015/16 involving staff, trustees or volunteers.

In April this year, a report published by the Charity Commission said that most insider fraud at charities was enabled by "excessive trust and lack of challenge from others within the charity".

This lack of scrutiny can be a particular problem in small charities, where boards are more likely to rely on the goodwill of senior managers to "do the right thing", resources to distribute financial responsibility among staff are lacking and a more relaxed approach can lead to financial controls being routinely waived. However, it is these smaller charities for which the consequences of insider fraud, in terms of both finances and reputation, can be most devastating.

In 2017, the former chief executive of Birmingham Dogs Home, Simon Price, was jailed after stealing £900,000 from the charity. His former partner, who had worked as the charity’s commercial manager, received a suspended jail sentence for her part in the fraud.

In handing down the sentences, the judge acknowledged not only the direct financial effects of the fraud, but also the impact on the charity’s longer-term income as a result of damage to its reputation. This impact is not just a theoretical one: research shows that a loss of reputation discourages donors and funders alike.

Fortunately for Birmingham Dogs Home, a large proportion of the stolen money can be returned, because Price had used much of it to fund a gambling addiction. In cases where stolen money has been spent on consumables, recovery is usually extremely difficult. In this case the money is due to be recovered from the gambling company, which had failed to conduct the required checks on the source of the cash Price had used.

As a relatively large charity with an annual income of over £1m, Birmingham Dogs Home survived the fraud revelations despite the inevitable impact on its bottom line. However, it is likely that a smaller charity would have floundered.

Trustees of smaller charities can minimise the risk of insider fraud by implementing some simple measures.

  • Having an anti-fraud policy in place ensures that all staff are clear on what constitutes fraud, as well as what to do when it is suspected. Guidance for producing a fraud policy is available from the Fraud Advisory Panel.

  • Developing a culture of ethical behaviour can encourage honesty and fairness, and promote the idea that everyone in the organisation is responsible for stopping fraud, not just trustees or finance people.

  • Implementing robust financial controls, including segregation of financial duties and regular recording of income and expenditure, reduces opportunity (and therefore temptation) for potential fraudsters. It is important that both senior staff and trustees adhere to these controls at all times, with no special privileges for anyone.

The relative simplicity of these measures means that there is no excuse for charities to let their turnovers dictate the level of scrutiny under which their managers operate. Preventing insider fraud is vital to ensuring a secure future and, in doing so, upholding the responsibility that every charity, regardless of size, has to its supporters, its beneficiaries and its staff.

Regan Peggs is a leading solicitor advocate with specialist experience in fraud law. As director and council member of Birmingham Law Society and former vice chair of governors of the Ronald McDonald House charity in Birmingham, Regan has experience serving on the boards of both a charity and an organisation representing the interests of more than 5,000 members

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