Internal fraud costs the charity sector about £2.5bn a year, according to a soon-to-be-published report.
The Annual Fraud Indicator (AFI), published by accountancy firm Crowe, estimates that “frauds of extraction” cost the sector £2.5bn a year.
This estimate is higher than the headline figure from the 2017 AFI, which estimated that the sector lost £2.3bn a year to fraud.
However, speaking to Charity Finance magazine, partner and head of non-profits at Crowe Naziar Hashemi said these figures only tell some of the story.
She said “frauds of diversion”, which is when money intended for a charity is sent elsewhere, are a whole other source of losses.
Hashemi said charities are more susceptible to frauds of diversion than other organisations, due to the voluntary nature of their income.
This income “cannot be monitored and controlled until it is received at the charity’s premises”, she said.
She advised: “Therefore, controls such as proper mail opening, recording and processing procedures, analysis of direct mail response rates, sensible analytical review of fundraising and income generation activities have to be relied upon.”
Meanwhile, Jonathan Orchard, partner at Sayer Vincent, suggested that charities might be more susceptible to internal fraud than private firm because they are less likely to have a financially literate chief executive.
He said that this could lead to charity chief executives not providing sufficient challenge to their finance director.
“While there are plenty of financially literate charity CEOs out there, they don’t come from a technical finance background,” he said.
“Therefore, they may not be asking their finance managers the right questions.”
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