DATELINE: February 25, 2009, Chicago
“He’d been a fellow trustee; he’d been a fellow young person; he’d been involved for over two years. And they [the trustees] were absolutely gutted… they were totally shocked, appalled, gutted by it. They couldn’t believe that they’d been let down. That was the main thing, the feeling of being let down.” From the Fraud Advisory Panel February 2009 report.
British terminology: choked up (He was gutted at the funeral, mate.)
The Fraud Advisory Panel is a UK registered charity which works to raise awareness of the human, social and economic damage caused by fraud and to help individuals and organizations develop effective strategies to prevent it. They have just released a
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fascinating study about fraud in charitable sector. The findings are based on a survey sent to 5,000 registered charities in the England and Wales. Charities that were registered for less than 2 years with the Charity Commission or that had less than £10,000 in income were excluded. The survey used standard statistical sampling practices, including random sampling, stratification of respondents, and appropriate weighting to reflect the composition of the charitable sector. The survey produced 1,123 responses, or a 22% response rate, which the authors claim to be a good one. We don’t doubt the sincerity of the authors, but we wonder whether the non-responders were disproportionately comprised of charities that had experienced a fraud—they would rather not talk about the recent unpleasantness.
Here are some of study's findings:
(1) Half of the respondent charities viewed fraud as a major risk to the charitable sector.
(2) Only 40% of the respondent charities had any of the suggested anti-fraud policies and procedures in place. These anti-fraud policies and procedures included whistleblower policies (40%), fidelity insurance (16%), risk registers (14%), anti-fraud policies (11%), anti-money laundering policies (8%), fraud response plans (4%), and fraud awareness training (4%). What we find fascinating was the absence of any effort to measure the quality of internal accounting controls and the separation of incompatible functions.
(3) One burned, twice shy: Half of those charities that had been the victim of a fraud now had at least one anti-fraud measure in place.
(4) 7% of the respondent charities reported that they had been the victim of a fraud within the two-year period preceding the survey.
(5) Most frauds were relatively small in amount, with half below £1,000. However, 2% of the respondents experiencing fraud reported losses in excess of £100,000.
(6) 83% of respondent charities that had been victims of fraud reported it to the board of trustees.
(7) 75% of the victims reported the loss to the police or a bank.
(8) 66.66% took action against the fraudster. This most frequently action involved reporting the person to the police or terminating the person.
(9) Not surprisingly, 28% of frauds involved cash and 23% involved theft. Inventory (10%) and credit card (8%) frauds were the next two prevalent.
(10) Only 3% of the frauds were ongoing. Most (59%) had a duration of no more than 6 months. Thirty-six percent lasted for a month or less.
(11) Internal controls carry the day in terms of detecting fraud (46%). Somewhat surprisingly, whistleblowers were toward the bottom of the detection list, coming in at just 9%. The Association of Fraud Examiners reports a higher rate of detection attributable to whistleblowers (48.8%) in its 2008 Report to the Nation.
We will be very interested to see the statistics from the redesigned IRS Form 990 regarding material diversions of assets. Our eyeball impression is that the amount of fraud in the British charitable sector is not nearly as pronounced as the amount of fraud reported or assumed for the U.S. sector. The problem is that the reports for the U.S. sector largely have been anecdotal, whereas the Fraud Advisory Panel’s survey appears to be more scientific—although we call your attention to the possible reporting bias among survey recipients.
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