How to prevent fraud in 2023

Almost three in five charities believe they face a heightened risk of fraud in 2023, particularly from among their own staff.

 

The findings have emerged in research towards the end of 2022 among 100 charity representatives, and found that misappropriation of funds by their employees is “the most common type of fraud”.

 

While 58% of charities believe the risk of fraud will increase in 2023, just 1% believe it will fall.

 

The cost-of-living crisis and economic downturn are “potential catalysts” for this escalation in fraud, according to the research, which has been carried out by accountants Binder Dijker Otte (BDO) and anti-fraud charity Fraud Advisory Panel.

 

“Long experience shows that in times of recession fraud risks are often greatest just when defences are weakest,” says Fraud Advisory Panel Chair David Green.

“Our advice to charities is simple: now is not the time to take your eye off the ball. Take fraud risks as seriously as you can.”

 

BDO Fraud Director Tracey Kenworthy added: “While there is an acknowledgement among charities that we’re likely to see higher incidences of fraud next year, there is still a worrying level of complacency when it comes to preparing for and mitigating against the risks of fraud.

“What’s also concerning in our findings is the growing threat from a charity’s own staff and volunteers. Culturally, this is difficult for charity finance leaders.”

Here we look at how charities can protect themselves from fraud, with a particular focus on tackling threats from within their organisation.

 

 

Staff and volunteer fraud

 

The most common fraud among charities is already the misappropriation of cash or assets by staff or volunteers. This was cited by more than two in five of the charity representatives interviewed by BDO and Fraud Advisory Panel and more than double the level mentioned last year.

 

Staff expenses fraud was the next most mentioned form of insider fraud, cited by more than a quarter.

Among those charities detecting fraud, staff were the perpetrators in 46% of cases and volunteers in 9%

 

Charities can combat fraud in 2023 from staff and volunteers by ensuring there are strong financial management and governance processes in place and avoiding basic mistakes, according to the Charity Commission.

 

It advises charities to watch this e-learning video published by Fraud Advisory Panel on tackling insider fraud. You can check out the video here:

 

 

In addition, a report by the regulator on inside fraud advises charity leaders to ensure there is a “strong counter fraud culture” across the organisation. This should include:

• Carrying out appropriate employment checks to ensure charities are hiring honest members of staff. This includes checking references and details such as the sums of money involved in transactions in previous roles
• Consider appointing a trustee with specific responsibility for countering fraud
• Have strong financial controls in place – in particular a segregation of duties, where no single individual has sole responsibility for any transactions, from authorisation, completion and review.
• Review reports of transactions and carry out checks on internal controls. Are these controls fit for purpose and able to tackle insider fraud?

 

External threats

 

While incidents of external fraud from criminals are down, they are still prevalent among charities, according to BDO and Fraud Advisory Panel’s research. This details how just under a quarter (23%) of charity frauds was committed by a third party with no connection to the organisation. This is a reversal on last year’s figures when “external threats were greater than those from within”, say researchers.

 

The Charity Commission warns that charities face increasing threats from cyber criminals especially. These threats can be complex and difficult to detect, it warns.

 

According to the National Crime Agency (NCA) the most common cyber fraud threats are:

• Hacking, where email passwords are stolen
• Phishing, where fake emails ask for financial information
• Malicious software including ransomware, where criminals hijack files and hold them to ransom
• Distributed denial of service attacks against websites, which is often accompanied by extortion

The NCA recommends taking basic security steps, including:

• Choosing strong passwords that are not reused for multiple log ins
• Installing security software including anti-virus and two factor authentication
• Update all security software and operating systems. These can easily be set to update automatically

 

Procurement fraud

 

Another growing area of fraud is supplier and procurement crimes, that often involve internal and external threats combined. These have already increased markedly over the last year, from 5% in 2021 to 26% in 2022.

 

BDO and Fraud Advisory Panel say this form of fraud usually involves collusion between an insider and an external party.

 

Advice from Alan Bryce, Fraud Advisory Panel’s Business Fraud Campaign Manager includes:

• Not allowing one person to make all procurement decisions and authorise payments
• Regularly monitoring spending with suppliers to pinpoint any unusual activity
• Carrying out appropriate due diligence checks on suppliers