Fraud prevention and detection: how ready are you?

PwC UK Fraud wheel

The last Annual Fraud Indicator report published in June 2013 by the National Fraud Authority suggests that fraud costs charities around £147.3m annually. Losses to fraud could threaten the achievement of charitable objectives through financial and reputational impact, as well as have a detrimental effect on how all stakeholders view the organisation. Given the competition within the sector and the fact that there are always multiple charities supporting the same cause, the potential impact of fraud on a charity’s reputation and performance has never been greater. Your charity needs to go the extra mile to ensure that your brand does not become associated with fraud and corruption.

As those charged with governance of a charity, trustees have a duty under Charity Commission guidelines to use charitable funds and assets wisely to further charitable aims and not to place property, funds, assets or reputation at risk. However charities often think that they are less vulnerable to fraud, presuming that those that work and interact with their organisation will have strong cultural and ethical values. Recent fraud cases within the sector suggest that these views may well be overly complacent. Such cases include losses due to procurement fraud, charity credit card misuse, and diversion of service user monies and charitable donations. Added to this is a reluctance to pursue cases internally or externally for fear of reputational damage from associated publicity.

So the challenge for charities is: “is the sector less susceptible to fraud, or could more be done by to proactively prevent and detect fraud?”

The most efficient and cost-effective way for charities to deal with the threat of fraud is to be proactive, focus resources on prevention, and let intelligent automated systems shoulder the burden of detection. This will help to minimise losses and prevent a need for costly reactive investigations.

PwC’s most recent Global Economic Crime Survey found that organisations that had carried out a fraud risk assessment identified more fraud in their organisations than those who did not. The survey found that 75% of organisations in the UK performed at least one fraud risk assessment in the last two years, nearly 20% more than the global average. Is your charity within that 75%, and if so is your risk assessment detailed and up to date?

Good practice around fraud risk management would be to engage with stakeholders to ensure identified risks reflect the actual, rather than expected, environment in which they operate. Once risks have been identified, action can be taken to assess the robustness of controls to mitigate those risks. Furthermore, new policies, process and systems should be subject to a fraud impact assessment so that the risk of fraud is considered at design stage.

The survey also found that, in addition to fraud risk management, the most effective method of detecting fraud was suspicious transaction monitoring. Such activities need not be high in cost. Often just a simple review of transactions by management is sufficient to detect unusual spending patterns and activities. For example, we recently highlighted to one of our clients that a company credit card fraud could most likely have been detected a lot of earlier if management had reviewed transactions using some simple filters in an excel spreadsheet.

In addition, the survey reported a decline in a key method of fraud detection; whistle blowing. It was found that 83% of organisations have whistle blowing mechanisms, but 40% had not been used in the past year. Does your organisation have whistle blowing arrangements, and are they fit for purpose?

Our fraud wheel sets out how we benchmark counter fraud arrangements and programmes. The components of the wheel are areas to consider when assessing counter fraud arrangements.

As charities continue to come under more public scrutiny, do you have the confidence to say that your organsation is doing all it can to minimise losses to fraud?