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Peter Morgan

Mazars

Identifying and preventing internal fraud at charities

Guest blog by Mazars 

In the current economic climate, internal fraud is a concern for all organisations – and charities aren't exempt. How confident are you in your charity’s ability to mitigate the risk of and counter internal fraud?

In this piece, Mazars' Forensic Investigations and Compliance team explain the theory of fraud, its potential impacts and countermeasures, and further resources.

Why do people commit fraud?

In the context of the cost-of-living crisis, people have more motivation to commit fraud and may see their financial circumstances to justify their actions.

Particularly for those with access to finance systems or cash deposits, challenging  circumstances can create the ‘right moment’ to seize an opportunity and can make normally trustworthy people capable of doing bad things. A previously ethical employee can use their trustworthiness as a mental crutch to justify minor fraudulent behaviour. They might consider themselves ‘deserving’ of what they've stolen – particularly if they have been denied financial reward.

Charities may not have the financial flexibility to increase salaries in-line with inflation. They may rely more on volunteers or on the goodwill of employees to continue working without a pay rise. Without clear communication from management, employees and volunteers can become disillusioned – especially where there is high inequality in salaries. This can lead to disengaged employees or volunteers who have committed fraud believing they are ‘owed’ what they have stolen.

Preventing internal fraud

It is important to refresh your procedures and ensure you have sufficient internal controls to prevent and identify fraud.

The first step in prevention is to develop a strong culture of integrity and honesty within the organisation. A culture of integrity requires buy-in from everyone. Codes of conduct that don't extend to trustees and volunteers will be less effective than those that do. Organisations must communicate to all levels the consequences of non-compliance.

It's also vital to have strong internal controls and a clear understanding of their effectiveness. They cannot rely on trust and the goodwill of employees or volunteers. Wherever possible, two members of staff should review financial approvals to reduce autonomy. If resources allow, an external audit can provide a better understanding of internal controls and their effectiveness. Auditors can identify weaknesses and processes that don't comply with best practice or your policies.

An audit focuses on processes and procedures and any gaps for a fraudster to operate – they do not search for all possible instances of fraud. More specialised projects can also benefit charities, including targeted internal audit engagements.

Identifying internal fraud

While fraud prevention is critical, fraud identification is no less so. Charities should consider using technologies such as data analytics and artificial intelligence to identify patterns of suspicious behaviour. But these tools may be cost-prohibitive or unnecessarily complex for a charity with simple operations. You can also use simple review activities, such as spot checking bank statements, expenses, or invoice listings for validity, and having a strong anti-fraud culture where individuals can feel free to voice any concerns.

Finally, if you have identified fraud or someone has raised a concern, consider using forensic investigators.

Mazars reguarly investigates possible fraud events, using technology and proven methodologies to understand the nature of a fraud, quantifying any losses, identifying areas of weakness, and providing recommendations to strengthen the organisation. Mazars also provides preventative work, such as fraud health checks and training sessions tailored to specific risks.

Further resources

1. Anti-internal-fraud activities split into easy wins for the next month and longer-term initiatives for the next year.

Download checklist


2. Example case studies of internal fraud incidents at charities:

Download case studies


3. Example internal face-to-face presentation on fraud prevention:

Download presentation  

 

Mazars is an international, integrated and independent firm specialising in audit, accountancy, advisory and tax services.

For financial advice always seek an independent financial advisor. The information provided by Mazars is their own advice, CAF does not endorse any claims/advice made.