Being a good charity manager includes being a good people manager, as the articles below show.
Click on the headlines of your choice.
Effective and compliant governance and operation remain key priorities for charities, but are once again under the spotlight in the wake of high profile cases making the news. There are key issues facing the charity sector this year and lessons to be learned from these recent cases.
A continuation of virtual and/or hybrid working as a result of Covid continues to dominate the agenda for many charities, as well as the need to maintain team cohesion and relationships with beneficiaries and other associates.
Focus on purpose
There is also a shared desire to focus on the aims and purpose, and take account of the changing needs of beneficiaries, for example where individuals have been affected by Covid. So, it is timely and appropriate to review the objects of a charity, and the possibility of a change to these becoming easier now that Parliament has passed the Charities Act.
The Charities Act 2006 was intended to simplify and clarify the law, by reducing bureaucracy, especially for smaller charities; providing a definition of charity; and modernising the Charity Commission's functions and powers.
This was followed by the Charities Act 2011 which consolidated the bulk of the Charities Act 2006, outstanding provisions of the Charities Act 1993, and various other enactments.
Only the beginning
The Charities Act 2022 became law at the end of February, but this is only the beginning of the story. The new Act is to be welcomed and will be implemented on a phased basis. The Charity Commission is currently considering the order in which the various segments of the Act come into force, some of which require secondary legislation. There will also be changes to Charity Commission guidance. Within the Act, there are a number of helpful key features that create greater flexibility for charities. Among them are these highlights:
- Greater flexibility for the disposal and mortgaging of land, subject to various safeguards.
- The ability to change governing documents aligned as between unincorporated charities and corporate charities (whether companies or charitable incorporated organisations), which should make it more straightforward for unincorporated charities to change objects.
- More flexibility to deal with permanent endowment funds, simplifying the power to spend permanent endowment capital, and creating a statutory power to borrow against permanent endowment.
- Better ease for small ex gratia payments to be made.
In the news
Two very high profile charities recently hit the headlines, highlighting the need for good governance and also certain key issues faced by charities going forward.
KIDS COMPANY. The first is Kids Company (Keeping Kids Company) and the extensive report published by the Charity Commission on 10 February, which raised a considerable number of issues in relation to the running of charities generally.
This demand-led charity failed to maintain sufficient reserves to enable it to withstand difficulties. In particular, it did not carry the reserves to enable it to either continue or conduct an orderly winddown.
The Charity Commission’s report placed emphasis on having the right blend of skills and knowledge. It pointed out that some trustees and the chair had been in post for a long period, and that a rotation of roles - which would have allowed for an injection of new ideas and challenges about the way in which the charity operated - would have been sensible, and that this would have assisted with challenging the senior executive who had been in post for many years.
The report references:
- That the Public Administration and Constitutional Affairs Committee reports a failure to refresh the leadership of the charity.
- The need for board decisions to be documented carefully, particularly in relation to evidence of financial planning, to assist both donors and funders, and to protect trustees.
- The need to build a sustainable business model which does not disproportionately rely on government funding, nor a key individual for fundraising, which were issues in this case - acknowledging governmental or other similar granting models are present in other charities.
- Experience on the board of how reserves are dealt with in charities with similar business models would have been helpful.
The High Court judge’s findings in relation to the Official Receiver’s application for a disqualification order, included that the conduct of the trustees did not amount to incompetence of a high degree. The judge emphasised the need to ensure that individuals are not dissuaded from becoming trustees because of sanctions which might be imposed.
Notwithstanding this, the Charity Commission’s investigation was on the wider test of whether there had been misconduct or mismanagement.
Most important issues
The Charity Commission’s resulting report highlights issues for the sector as a whole, from which charities of all sizes should learn, most importantly:
- The importance of checks and balances, with the right mix of skills and experience on charity boards.
- Operating models to reflect the nature and scale of charities.
- The need for a proper reserves policy and financial planning.
- The need for a consideration of issues arising when charities get bigger.
CAPTAIN TOM FOUNDATION. The Captain Tom Foundation raised concerns from three regulators: the Fundraising Regulator, the Charity Commission and the Information Commissioner’s Office. It is understood that the charity has sought to work with the regulatory bodies.
What the charity’s situation highlights is the need for transparency and care with legal compliance in relation to fundraising as, once again, we have a case which shows that damage may be caused to an individual charity, and the charity sector as a whole, because of issues raised – whether perceived or real.
Charities must ensure that statements concerning fundraising contain the necessary details, including compliance with statutory requirements in relation to amounts received by commercial organisations connected with it. They must also make sure that data protection issues are properly addressed.
The Captain Tom Foundation is a high profile charity which has raised a lot of money, and so it is essential that concerns are seen to be dealt with seriously, as does seem the case, to maintain trust and confidence in this charity, and also fundraising in the charity sector.
GIVING INITIATIVE TO SUPPORT UKRAINE. This initiative raises various issues which have been highlighted by regulators including:
- The desirability of giving to registered, regulated charities.
- The need for charities to observe sanctions requirements.
- The need for safe giving to registered charities with both government and fundraising guidance available.
- The need for charities to follow guidance when operating in high risk areas – in particular the Charity Commission guidance: “Charities: how to manage risks when working internationally”.
- The need for care when accepting donations, which may lead to reputational damage and also because it may be difficult to return a donation once received.
LEHTAMAKI v COOPER. A separate case has clarified and set out the duties of members of charities, and whilst the case of Lehtamaki v Cooper relates to members of charitable companies limited by guarantee, it also applies to other forms of charity.
Fiduciary obligations owed
Essentially, the case provides that members owe fiduciary obligations to exercise some of their functions for the sole purpose of advancing the charity’s objects. This means that members of charities would be expected to exercise their functions in such a way that they disregard any self-interest, and that the members have fiduciary duties in relation to those functions.
The extent to which members are required to comply with these duties will depend on the precise circumstances of each case, and it is difficult to generalise.
That said, this case provided that the court had the power to direct a member as to how to exercise the fiduciary duty – very much on the facts of the case.
The case is complicated, not least because, although the ultimate decision of all the judges of the Supreme Court was the same, the reasoning used differed.
Fiduciaries and their duties
A fiduciary relationship is one of trust and confidence, with the fiduciary owing a single-minded duty of loyalty, which means that fiduciaries cannot exercise any power so as to benefit the members.
These are some of the facets of a fiduciary relationship:
- Fiduciaries must not put themselves in a position where their interests and the interests of their beneficiaries conflict.
- Fiduciaries must not make a profit out of their position.
- Fiduciaries must act in good faith to serve the best interests of their beneficiaries.
The principles of the case apply to members of other types of charitable organisation and the differences between the duties of members in different types of charity will have to be worked out.
The differences between duties of members of other forms of charity and CIOs are yet to be worked out.
It is not considered that the obligations should depend on the size of the membership. However, there may be reasons why people become members which may affect the extent of their duty – for example, supporters of its aims, those who wish to obtain a benefit from it, and those who wish to play a role in its governance.
In conclusion, charity members are considered to have agreed to exercise at least some of their functions for the sole purpose of advancing the charity’s objects, and as a consequence those functions must be exercised in such a way that members satisfy fiduciary obligations in relation to those functions as set out above.
It is hoped that the Charity Commission will provide clear guidance in due course.
"The Charity Commission is currently considering the order in which the various segments of the Act come into force, some of which require secondary legislation."
Most charities have a connection to property ownership - whether it be a generous donor who has bequeathed property, a lease on premises from which to operate, a string of investment properties, or retail premises occupied for the purpose of raising funds to support the charity.
With the complexities of property management, hiring a property professional to offer advice and guidance on the multiple issues relating to property which can arise would be beneficial for trustees, allowing them to feel less exposed to significant risks.
However, this would require an additional cost, eating into the precious funds that would otherwise be spent on the charitable purpose. Trustees are therefore tempted to save money by taking decisions without obtaining advice.
But is that a false economy? In avoiding taking advice, what risks does a trustee face?
Consider some of the common issues relating to property ownership that charities might come across on a daily basis.
Selling or letting
If the charity’s governing document allows the charity to buy or lease a property, then the trustees must ensure they have secured the best deal for the charity in any proposed sale or letting. The Charities Act 2011 requires that written advice from a qualified surveyor must be sought (unless the lease proposed is less than seven years).
The property identified to be sold or let must have been openly marketed for sale to ensure that best value can be shown to have been obtained. Any trustee not following these rules is opening themselves to a possible challenge.
Of course, there are exemptions to these rules that trustees can explore, but if selling to a connected party, or below market value or if the charity wishes to ignore the advice of the qualified surveyor, then formal Charity Commission approval will also be required.
Obtaining a qualified surveyor’s report will give the trustees peace of mind that the action they propose is right in property terms.
Using surveyors to sell property on behalf of the charity also means that responsibility for matters - such as demonstrating best value has been obtained, the property has been fully marketed, complying with money laundering legislation and undertaking identity checks of potential purchasers - will be passed to the appointed agent, shielding the trustees from the responsibility.
Given that buying property is a common method used by organised criminals to launder proceeds of criminal activity, this is a very real responsibility and failure to undertake such checks can lead to significant fines.
Similarly, for buying property, the trustees must be able to demonstrate the price proposed to be paid is fair, that it is in the best interests of the charity to acquire the property and that all the obligations of ownership - including any restrictions on title, on the lease or in planning terms - are fully understood before taking ownership. Without specialist advice there is a risk that decisions taken can be challenged or onerous property can be acquired.
If taking a property by lease rather than outright ownership, there is the added complexity of negotiating the lease terms. It is essential to avoid undue liability falling to the charity. The lease is clearly a negotiation between the landlord and the tenant on all matters relating to the occupation of the property and, as such, it is essentially market driven.
In a strong property market where landlords have queues of potential occupiers for their premises, the lease clauses will favour the landlord as alternative tenants can easily be found. In a poor market where landlords are faced with rental voids, or costs of vacant property, they may be more open to occupiers’ demands. In this way liabilities such as dilapidation and repair can be limited, break clauses inserted, and other terms drafted to suit the occupier.
It is essential that this bargaining position is understood at the outset of a negotiation, so it is therefore imperative to seek trusted, market based property advice. Having clarity on the charity’s “must haves” in any negotiation allows a property adviser to negotiate to best effect. Landlords are currently very concerned about voids – especially in their retail portfolios, so are willing to consider changing leases to secure good quality tenant covenants. Charities need to take advantage and drive hard bargains.
When taking property for investment purposes, the need for market related advice is clear. Significant risk is attached to owning property as an investment, as occupying tenants can go into receivership, leaving rental voids and significant unexpected liability for the trustees. Taking advice on the lease terms, covenant strength and the market trends in the vicinity will ensure the trustees are acting in the best interests of the charity and with the benefit of specialist, independent advice.
Once in ownership or occupation of property the complexity does not end. Possibly the highest expenditure relating to most commercial property after staff costs (and rent if a leased property) are business rates. The rates liability is based on the Valuation Office calculation of a hypothetical rental value of the premises, known as a rateable value.
Revaluations are undertaken on an irregular basis and look at the market evidence at that date. The most recent revaluation was undertaken in 2017 with a valuation date of 1 April 2015. Charities and community amateur sports clubs receive a mandatory charitable rate relief of 80% if a property is used for charitable purposes. A further 20% can be applied for and given at the discretion of the local authority, although rules do vary from authority to authority.
Without professional advice, many charities are missing out on business rate relief and consequently overheads are higher than necessary. Even if a relief has been claimed, sometimes the valuation itself can be challenged and a further reduction effected, in some cases removing the liability altogether.
Further occupational liabilities that fall to the trustees as owners or occupiers include property maintenance, ensuring compliance with fire safety regulation, asbestos regulation, legionella testing, health and safety regulation, equality legislation, energy performance regulations, electrical appliance checking regulation, to name a few.
Residential premises attract additional regulations and include annual gas safety checks, fire appliance checks, EPC certificate, compliance with the Fit for Human Habitation Act, as well as regulations concerning the way in which landlords hold deposits and implement service charges. Further regulation will apply if the property is a house in multiple occupation (HMO). Evidence of compliance will be required in order to avoid fines or prosecution.
Property owners or occupiers need to have good data management systems to record when inspections have occurred and set reminders for when future inspections are due, to avoid running the risk of fines or worse.
Even when the lease is in place and all the occupier’s responsibilities have been satisfied there is the periodic rent review provision.
The charity might be either the landlord or the tenant, but in either case careful consideration needs to be given to the terms of the lease at rent review. Some leases allow for upwards or downwards reviews, so careless triggering of a rent review clause may cause unwanted results.
Market knowledge is essential to inform the rent review process as, unless index linked, rents are usually calculated by reference to transactions involving similar properties. Remember, the rent is being agreed until the next rent review period, so even small annual reductions or increases can multiply into bigger savings or costs when looked at over the period to the next review.
Trustees should therefore ensure they have access to good market knowledge at rent review and lease expiry, as well as advisers with a thorough understanding of the Landlord and Tenant Act 1954 if the lease in place is covered by its provisions.
So, having made sure the lease is well negotiated, the terms are fair and the property inspections are up to date, does the duty to do the best for the charity end there? No, I’m afraid not. Property owning charities must then ensure they keep their eye on what is going on in the surrounding area, particularly with regard to the statutory Local Plan which will go through periodic review.
As a consequence of such review it is possible that the property will have potential development value, or will be affected by development proposed in the vicinity. Going back to one of the main duties of a trustee – to manage the charity’s resources responsibly – if development potential exists then it would be sensible to be aware of this in order that opportunities to secure additional value can be exploited.
Property owning trustees should therefore actively interact with the Local Plan process in each property location, be aware of proposals for development and respond to calls for sites that might enhance the value of property assets.
Charities may be required to provide annual valuations of their property assets for financial statements under the Charities SORP Regulations FRS102. These are usually formal valuations that require to be undertaken by RICS registered valuers under the auspices of the RICS “Red Book”. Whilst a seemingly expensive exercise they provide an excellent opportunity for the selected adviser to review many matters raised in this article, making the most of the single inspection.
In summary, owning property is a considerable responsibility and potential liability as well as a significant asset. It is imperative for property owning charity trustees to ensure they access market focused, specialist advice, to avoid costly pitfalls. This way property can be a true asset, helping to deliver the charity’s core objectives.
"Property owning charities must…ensure they keep their eye on what is going on in the surrounding area, particularly with regard to the statutory Local Plan which will go through periodic review."
Air Ambulance Kent Surrey Sussex (AAKSS) is a helicopter emergency medical service which operates out of Redhill, Surrey and Rochester, Kent. We serve a population of 4.7m people plus those who travel through the area. Our crews of pilots/co-pilots operate three helicopters and fly 2,500 missions a year with on-board medical assistance provided by doctors and paramedics. Of the more than £11m needed to sustain the service each year, 92% is raised by public donation and fundraising with the remaining 8% provided by the NHS.
As an independent charity delivering pre-hospital emergency medicine, AAKSS is accountable to five principal regulators including the Charity Commission, Care Quality Commission and, perhaps less predictably, the Gambling Commission. A successful lottery accounts for over 50% of our income and a CQC inspection conducted last year provides a glowing account of outstanding patient care.
A governance review could appear – and perhaps has appeared - as an attempt to fix what isn’t broken given that we are considered a leader in our field and have benefited from a relatively secure financial position. However, for the current board of trustees, the imperative to diversify our income streams and standardise safeguarding across the charity has become increasingly urgent, not only from the perspective of risk but also of values.
Caring is one of our core values and a considered approach to what this means in the context of pre-hospital emergency medicine raises some important ethical and organisational implications.
Our staff care deeply about patient outcomes. However, the clinical involvement of doctors and paramedics with the patient is an intense and relatively brief one and often they will never know what happened following handover at the receiving hospital. It is clear that a significant number of patients want to express gratitude to the people and organisation that, in their view, saved their lives. This gratitude represents considerable potential income.
Strong evidence from the United States suggests that, when appropriately stewarded, this expression is beneficial to both the patient and to those who provide care. Sadly, not all patients survive and bereaved relatives care that all that could have been done was done, and some feel the need to meet those present in their deceased relative’s final moments.
One of the challenges of pre-hospital emergency medicine delivered by a charity such as AAKSS is that normally there is no formal mechanism for maintaining a dialogue with patients and relatives. A relatively small proportion find their way back to us and the “base visits” which feature prominently on our website tell moving stories of patient and crew reunions. In light of the evidence of the emotional benefits of maintaining this connection, our digital strategy including our website design, will optimise opportunities for former patients and relatives to get in touch.
A newly created patient liaison role is intended to provide specialist expertise to manage these important relationships. It takes into consideration both the nature of care in this context and the nature of risk, and reinforces the need for specialist skills and for a holistic approach. This extends to the safeguarding and care for our own staff in relating to people who have experienced major trauma, including life changing injuries, and bereavement.
Reunions with former patients or relatives can be emotional for the crews and, given that they take place at an airfield where the helicopters are based rather than in a hospital, appropriate boundaries and safeguards need to be in place. As one highly experienced paramedic pointed out, the reunion can close a loop for them too and reunite them with people they feared would not survive.
The patients themselves may be unconscious but the crew members are acutely aware of what have often been harrowing events. They need to make judgments about how much they should share and how involved they want to be in a visit, if at all.
In a culture of continuous improvement in which our teams take enormous pride in delivering outstanding patient care, the creation of the patient liaison role represents an incremental step in further developing the nature of care provided. In this we have taken notice of the approach of our peers, notably the London Air Ambulance, in not limiting the caring relationship to the pre hospital period but to think much more holistically about what it means.
This could include signposting former patients to other services or establishing peer relationships with others who have experienced major trauma.
Of primary concern in all of this is our commitment to ensuring the physical and emotional safety of people who have been through a major trauma and may have suffered life changing injuries or bereavement. Given that our crews are treating the most sick and seriously injured people, patients themselves often have no recollection of events but may feel a need to know what happened.
Significantly, the patient liaison role needs to respect their desire to give back to the charity in a meaningful way and to ensure a sense of belonging, assuming that it is part of our duty of care to do so. Many people are unaware that air ambulance services are delivered by charities and a very common response is a strongly felt desire to raise money, both by donating directly but also by using networks to achieve greater effect.
Over the years many of our volunteers have come forward because they have been touched personally by the charity and are given roles within our offices, helping with the administration of our fundraising or going out into the community to give talks.
However, the increased scrutiny of fundraising practices within the charity sector with safeguarding as its dominant theme has necessitated a hard look at freedoms that, in the past, have been taken for granted.
Our safeguarding review of fundraising has resulted in much tighter recruitment processes for volunteers including consideration of DBS checks and placing restrictions on public facing roles which may include entering schools. It has also prompted consideration of how we create meaningful engagement for former patients and relatives who may not necessarily fit existing volunteer role profiles.
Two important additions to our board of trustees are providing further enlightenment for our considerations of the relationship of care. In an open recruitment process, one of them began his application with the words “this charity saved my life”. Once recovered he insisted on paying for the cost of the mission that saved him and took the opportunity to join the board as soon as it became available.
The other new trustee is a very senior clinician who has been a leader in the Surviving Sepsis campaign and has first hand knowledge of the power of patient advocacy following trauma, as well as a strong commitment to ensuring emotional safety in acute medical situations.
These improvements to our governance and consequent organisational changes have required balance and real thought about what it means to be caring. Recognition of the need of former patients and relatives to express gratitude takes into account the concern of staff not to appear to be “ambulance chasing” or to take advantage of people at a time of vulnerability.
Care for their emotional safety needs to be balanced against the welfare and emotions of our staff, including of course the clinical and operational crews. Current anxieties about safeguarding in the charity sector need to be balanced against the good will and trust that former patients and relatives feel for our charity and that we wish to honour in return. It is not always an easy balance to achieve but our governance review has produced new opportunities for meaningful engagement and for philanthropy.
"One of the challenges of pre-hospital emergency medicine…is that normally there is no formal mechanism for maintaining a dialogue with patients and relatives."
"Our safeguarding review of fundraising has resulted in much tighter recruitment processes for volunteers…"
Prince Harry’s charity Sentebale is said to have become a target for “cyber crooks” who are “making sustained attempts to exploit the charity…by luring potential supporters into making donations to bogus online accounts”, according to the Daily Mail.
Fraud not only impacts hugely on the vital work charities do but can also be extremely damaging from a reputation management perspective. The estimated annual fraud loss in registered charities in 2017 was approximately £2.3 billion and more recent indications suggest that this figure is only set to increase.
Fraudsters are becoming ever more sophisticated in their methodology and whilst we are still seeing regular instances of internal fraud, such as misuse of charity money, and external fraud, such as false invoicing and fake fundraising, there can be little doubt that cyber fraud is on the up.
The Department for Media and Culture estimates that in the last year 22% of charities have experienced cyber security breaches with the most common forms of attack phishing emails, others impersonating an organisation online (as is reported to be the case with Sentebale) and viruses or other malware, including ransomware (a form of software preventing effective control of data stored on a device until a ransom is paid).
Experience shows that prevention is the best cure when it comes to any kind of fraud. Charities, irrespective of size and stature, need to prioritise reflecting on their own potential exposure and working to not only protect against fraud but also to have a plan in place to ensure an effective response if fraud is detected.
The first step for all charities is to conduct a thorough risk assessment. Whilst any such assessment would be specific to each organisation this would be likely to include considering which of the charity’s activities leave it most vulnerable to fraud, the level of existing fraud awareness within the charity and whether the charity has an appropriate anti-fraud policy in place.
A charity’s potential vulnerabilities are far ranging but some of the most common include reliance on multiple volunteers with a high turnover (who are therefore difficult to closely monitor), cash-based fundraising, the numerous complexities involved with international work (see further below) and technological advances such as mobile banking.
Something also often seen is one individual at a charity having sole charge and responsibility for all financial processing and reporting. This clearly leaves the charity unnecessarily exposed. The introduction of internal controls to ensure adequate checks are in place for making and authorising payments, or rotating responsibility for certain tasks in high risk areas to ensure no one person has control for an extended period of time, are relativity straightforward ways to alleviate this risk.
Project funding, particularly abroad where there might be inadequate legislation surrounding bribery and corruption, is another significant risk area. It is of course vital that funds hard- earned for a particular cause end up in the right place. Without carefully monitoring, and the appropriate level of checks of a charity’s partners on the ground, it is sadly too often the case that this does not happen.
As to awareness, training should be implemented to ensure that employees at all levels have a basic knowledge of potential threats as well putting in place the appropriate mechanisms to alert the charity to potential new fraud risks. Recent examples of cyber fraud might include phishing, ransomware, cyber-hacking of financial accounts and interception of email communications to third parties containing sensitive financial information.
Electing a senior staff member (or members) to keep on top of industry news and take responsibility for circulating updates and guidance is a good starting point.
For example, in December last year it was reported that the Save the Children Federation (part of the global Save the Children organisation) had fallen victim to a scam whereby the fraudster had accessed an employee’s email account and used that to channel requests for approximately $1 million of charity monies to be transferred to an unauthorised third party.
Alerting employees to reports like this, as well as formal guidance such as that recently issued by the Charity Aid Foundation in relation to fraudulent emails, can only serve to bolster a charity’s fraud defence.
An appropriate anti-fraud policy is central to a charity’s ability to reduce the risk of fraud and can also act as a deterrent to potential fraudsters. The purpose of the policy is to provide a definition of fraud and define authority levels, responsibilities for action, and reporting lines in the event of suspected, attempted or actual fraud.
When it comes to fraud detection, it is important to know the warning signs of a potential fraud. Red flags might include irregular invoicing, a sudden change in an employee’s behaviour or missing documents or records. Thorough checks and controls are central to identifying possible anomalies.
For example, an obvious reoccurring theme with fraudulent activity is the processing of false financial or other documentation and therefore producing an internal document highlighting some of the possible warning signs provides a relatively straightforward additional layer of protection.
One often sees fraudulent payments made to an account seemingly in the correct name, but on closer inspection historically the formatting of that name has previously been different (i.e. an initial for the forename instead of the full name or the surname has featured first). Whilst this is a very subtle difference to an untrained eye, it is not difficult to spot if working to a checklist alerting the employee to look out for such a change.
It is common knowledge that an organisation’s eyes and ears are its employees and therefore ensuring that they are comfortable in reporting a suspected fraud may help to minimise any potential fall out.
A culture of transparency and clear communications, and making it known that everyone associated with the charity has a responsibility for being vigilant and keeping an eye out for any signs of fraud are important. As is a written procedure that deals with how to report suspected fraud confidentially. It should be borne in mind that an internal disclosure is likely to be less damaging than a report made to an external third party.
A question that often arises is the extent to which an accountant or auditor is expected to spot fraudulent activity. This is not always clear cut. Best practice guidance issued by the Financial Reporting Council (with reference to the International Standards on Auditing) records:
“The auditor of a charity is responsible for forming an opinion as to whether financial statements show a true and fair view and to this end the auditor plans, performs and evaluates the audit in order to have a reasonable expectation of detecting material misstatements in the financial statements arising from error or fraud.”
Ultimately however, it is the trustees of a charity who are responsible for the prevention and detection of fraud.
Failure to react quickly and properly investigate a fraud can have potentially disastrous consequences, not least the possible destruction of crucial evidence necessary to pursue criminal or civil proceedings. A taiIored fraud response plan clearly setting out what steps should be taken when a suspected fraud is first identified (and subsequently) will assist greatly in ensuring a considered but efficient response should the worst occur.
A checklist of steps likely to be required within 24 hours of a fraud being detected is as follows:
- Contact the charity’s legal advisers and ensure that they are copied in to correspondence relating to the investigation to preserve legal professional privilege.
- Assemble an investigation team (a core team of people to work together to investigate and combat the fraud).
- Determine the charity’s objectives in conducting the investigation in order to develop a strategy for moving forward.
- Review how the potential fraud and related investigation could affect the charity’s public relations were details to be made public.
- Consider privacy and data protection issues.
- Secure evidence lawfully. Capture relevant data and preserve it.
- Ensure that the suspected fraudster is not aware that the potential fraud has been identified.
- Identify and interview witnesses ensuring detailed records are kept of each witness’s account.
- Keep under review whether it is necessary to notify the Charity Commission of, or update it on, the suspected fraud/investigation.
- Review any loss that has been suffered and any risk that this might increase.
- Follow and preserve the charity’s money/assets putting in place restrictions as required.
Once a thorough investigation has been completed it will then be necessary to consider next steps including the legal options. It is possible that the police may need to be involved and steps taken in relation to a criminal prosecution or civil action pursued to recover funds.
Trustees have a general duty to act in the best interests of their charity. They have a duty to protect a charity’s assets and where necessary to recover assets belonging to the charity. The risks and consequences of any potential legal action, including the potential costs and time ramifications, should always be carefully considered in light of these duties.
The Charity Commission, in partnership with the Fraud Advisory Panel, has recently launched a fraud resilience survey with the aim of getting a better understanding both of charities’ resilience to fraud and their levels of cyber security. One awaits with interest the outcome of this survey but in the interim can only reiterate the importance of taking preventative steps now to seek to best protect your organisation.
Charities are built on foundations of public trust and confidence and every effort should be made to avoid the potential financial and reputational damage of falling victim to fraud.