Charities and NGOs: plug the funding drain

With its Charities Back on Track report, the Charity Commission has begun
2009 by banging the drum on compliance issues.

It has good reason to do so. Whether it is allegations of funds or goods
going astray after the earthquakes, famines and wars that prompt huge levels of
public donations to charities and NGOs, or individual cases of charities ripped
off by unscrupulous staff, the third sector is as vulnerable to fraudulent
activity and mismanagement as any other.

As the report sombrely puts it: ‘Accounting and reporting requirements are
not merely an administrative requirement for most charities… A lack of proper
controls exacerbates existing problems and makes it harder for charities to get
themselves back on a proper footing when problems arise.’

The commission has not been shy about going into details of its own
compliance and investigative work, including the case of a treasurer to a
cultural community centre who opened a bank account in the charity’s name, but
under his sole control, into which he placed nearly £25,000 of the charity’s

David Walker, head of outreach and development at the Commission, says
prevention is always better than cure. ‘By drawing out key themes from the last
year’s compliance and investigative work we hope more trustees can ensure they
have systems in place to make sure they don’t become one of these casualties.

‘The vast majority of charities account and report properly on their income
and expenditure. However, as we demonstrate in our report, a significant number
of cases that we deal with in our compliance function involve poor and
inadequate basic accounting practices and reporting. This lays charities open to
abuse, such as fraud and misappropriation, and the lack of transparency and
accountability can seriously damage a charity’s reputation, and potentially that
of the wider sector.’

Professional advisers, the commission and others have long trumpeted the
importance of controls to protect charities’ funds and the employees who work
for them: the proper segregation of duties; two people to count cash donations,
not one; two signatories on bank accounts, and so on.

Keith Hickey, chief executive of the Charity Finance Directors’ Group, says
that now is the time for trustees and management teams to pay attention to
whether controls are in place and working effectively. ‘It is one of the sad
facts of life that in times like these crime increases and clearly there is an
increased risk of fraud. The bottom line is that trustees have a duty to protect
the assets of a charity.’

Although larger and older charities are likely to have protocols in place,
they are not invulnerable, says Richard Parlour, a consultant on fraud and
principal of Financial Markets Law International. Rules can be overlooked or
circumvented and in his view, the economic outlook should make all charities and
non-governmental organisations pause for thought.

‘Everyone thinks that bigger organisations won’t be at risk,’ he says. ‘In
fact, it’s a damn sight easier to get away with things in a big organisation:
it’s a bigger haystack. Really, the difference is between well run and badly run

Complacency rather than lack of scale is the enemy, Parlour believes. And if
harder times bring a fall in donations, there is increased risk. When times are
good and donations rolling in, there may be less incentive to scrutinise
operations and protocols.

‘The big thing that has changed is the economic situation,’ he says. ‘All of
a sudden people are being much more vigilant and may start spotting fraud in the
areas they’ve ignored.’

Andy Copestake, finance director at the National Trust, agrees that
reputational risk is an important issue and that measures must be in place to
manage that risk. He says that the National Trust goes to great lengths to
ensure its employees can flag up potential problems, including the opportunity
to blow the whistle on any financial wrongdoing directly to the head of the
organisation’s audit committee. Internal audit and awareness of reputational
risk must operate in tandem.

As economic conditions deteriorate, greater vigilance should be high on
everyone’s agenda.

Walker says: ‘Realistically, financial controls will never eliminate the risk
that a charity will lose money through fraud or when something goes wrong. They
should, however, reduce the risk of those things happening. And, if they do
happen, they should help the trustees to find out sooner and take whatever
action is necessary.’

Guidance for trustees

Charities with an annual income of more than £250,000, and all charitable
companies, must report on an accruals basis in accordance with Accounting and
Reporting by Charities: Statement of Recommended Practice.

Other charities can prepare accounts on a receipts and payment basis.

Charities with an annual income of £10,000 or more must file their accounts
with the Charity Commission within 10 months of their financial year-end.

The Charity Commission’s website provides plenty of detailed guidance,
including reporting requirements for charities, and advice for trustees in
preparing accounts.

More protection

Members of the public or people involved in charity work often turn to the
Charities Commission as a first port of call for complaints, but it has limited
powers. Accordingly, it is providing clear information on the kind of issues in
which it can intervene in its Complaints about Charities guidance. The document
also sets out how employees concerned about individuals or activities at a
charity can blow the whistle under the Public Interest Disclosure Act 1998.

Other measures to protect charities include better guidance for reporting
serious incidents. The Commission is also strengthening its links with other
regulatory and enforcement agencies.

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