The regulator reviewed a sample of 20 charity cases that had either confirmed an insider fraud incident to the Commission, or where information suggested that the charity was at an increased risk. It was evident that in 19 of the 20 charity cases analysed, the absence of appropriate controls was the primary enabling factor – in either allowing the fraud to occur or in making the charity more vulnerable to fraud.

It also considered 54 responses to a six-week call for information about insider fraud, a third of which were from charities with an income of over £1m.

The regulator’s analysis shows the majority of insider fraud was committed by an employee (43%), but a third (33%) of cases involved a trustee and 10% a volunteer.

Respondents suggested the prime factor was excessive trust or responsibility placed on one individual (43%), while 24% said insider fraud was due to a lack of challenge or oversight and 24% cited either the absence of controls or existing controls being poorly applied.

Specific examples where weak or non-existent controls had enabled the fraud to occur included failure to reconcile transactions and bank statements on a regular basis; poor segregation of duties/ unclear responsibility for financial controls; having only one signatory for bank transaction; and only one individual counting cash collections.

The Commission’s research also found that 38% of cases were not reported to Action Fraud and 43% were not reported to the Commission itself, which it described as concerning.

The study showed 19% of frauds reported to the authorities resulted in a prosecution, while in 38% of cases part or all of the money/assets taken was recovered. Many charities (81%) undertook a review of existing controls following the fraud, while 76% reported that the frauds prompted media coverage.

The Commission said its findings follow a number of high profile cases of insider fraud in charities recently, including Birmingham Dogs Home, where the former chief-executive stole £900,000 from the charity. The head of finance at NSA Afan was jailed earlier this week for spending almost £54,000 of the charity’s money for her own personal gain.

The Commission has published advice for charities on improving their resilience to fraud, as well as a number of anonymised case studies alongside the report. These demonstrate cases of poor or non-application of financial controls, low fraud awareness, and excessive trust or lack of challenge and include the example of a finance director who defrauded a charity of over £900,000 over a seven year period, which only came to light after the director had been made redundant.

Michelle Russell, director of investigations, monitoring and enforcement at the Charity Commission, said: ‘Our report has confirmed what we already suspected from our casework in this area. The crucial lesson for charities isn’t about introducing lengthy counter-fraud policies.

‘It’s about changing people’s behaviours and encouraging staff and all those involved in charities to be vigilant and speak out when things don’t seem right. This must be demonstrated by everyone in an organisation to be truly effective.

‘A dangerous combination of a lack of accountability and controls not being consistently applied can make any charity - big or small – vulnerable, and create opportunities for fraudsters that will have devastating effects.’

Focus on insider fraud in charities is here.

Case studies of insider fraud in charities are here.

Report by Pat Sweet