Charities play a vital role in society, providing essential support to those in need. However, recent findings from an ICAEW survey highlight a persistent and worrying issue within the sector: internal fraud. As the financial pressures on charities continue to rise, so do the risks associated with mismanagement and fraudulent activity from within.
The Scale of the Issue
According to the survey, many charities have experienced some form of internal fraud in recent years, ranging from asset misappropriation to false expense claims. Given that charities operate on limited resources and rely heavily on public trust, any financial losses due to fraud can significantly impact their ability to deliver services.
Fraudulent activities within charities can take multiple forms, including:
- Payroll fraud – Manipulating payroll records to divert funds.
- Procurement fraud – Inflated or falsified supplier invoices.
- Expense fraud – Submitting exaggerated or non-existent claims.
- Theft of funds – Directly siphoning money from donations or grants.
Why Are Charities Vulnerable?
Charities often have a higher risk of fraud due to several factors:
- Limited Oversight – Smaller charities may lack dedicated finance teams, leading to weaker financial controls.
- High Levels of Trust – Many charities operate with a culture of trust, sometimes leading to inadequate checks on internal staff and volunteers.
- Resource Constraints – Many organisations lack the funding to invest in robust anti-fraud measures, making them attractive targets for opportunistic fraudsters.
- Complex Funding Streams – Multiple revenue sources, such as grants, donations, and fundraising events, can make it challenging to track finances effectively.
Steps to Reduce Internal Fraud Risks
While the risk of fraud cannot be eliminated entirely, charities can take proactive steps to mitigate their exposure:
- Strengthen Financial Controls
- Implement clear segregation of duties to ensure that no single person has complete control over financial transactions.
- Introduce dual authorisation for payments and expenditure approvals.
- Regularly reconcile bank accounts and monitor unusual transactions.
- Conduct Regular Audits & Reviews
- Engage external auditors or independent examiners to review financial records.
- Perform surprise audits to deter fraudulent behaviour.
- Encourage trustees to actively oversee financial matters.
- Implement Whistleblowing Policies
- Establish an anonymous reporting mechanism for employees and volunteers.
- Promote a culture where staff feel safe to report suspicious activity without fear of retaliation.
- Invest in Fraud Awareness Training
- Educate employees and volunteers on common fraud risks and warning signs.
- Train staff on ethical financial practices and the importance of accountability.
- Leverage Technology
- Use digital accounting systems with built-in fraud detection tools.
- Implement access controls to limit financial data exposure.
- Monitor transactions using AI-powered fraud detection software where possible.
The Importance of Proactive Fraud Prevention
Public trust is the backbone of any charitable organisation. When fraud occurs, not only does it lead to financial loss, but it can also damage an organisation’s reputation, making it harder to secure future funding and donations. Taking a proactive stance in implementing strong governance and financial controls can help charities reduce fraud risks and continue their vital work with integrity.
By addressing these challenges head-on, charities can safeguard their resources and maintain the trust of the communities they serve. As fraud threats continue to evolve, vigilance and a commitment to robust financial management will be essential in protecting charitable organisations from internal fraud.
Need Support? If you’re a charity trustee or financial manager looking to enhance fraud prevention measures, please contact us at BHP for a no-obligation discussion.
