The Non-financial Costs of Fraud

When we think of fraud, we immediately think of misappropriated and diverted funds leading to an immediate financial loss; but this is not the only impact that fraud can have on a charity. There are other non-financial consequences that should also be considered when responding to an incident of fraud.

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Further, what might start out as a non-financial consequence, may in fact have knock-on effects on key income streams, which can lead to further indirect financial losses. We explore some of these non-financial consequences below.

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Reputational damage

In the 2023 Charity Fraud Survey (the Survey), 24% of respondents who experienced a fraud reported that it had caused reputational damage. This was the second most common non-financial impact this year; interestingly, this was the most common impact last year, with 31% reporting reputational harm as a result of a fraud.

Reputation is crucial for charities given that public trust and confidence is vital for fundraising and donations. Charities must take steps to protect their reputation, especially after a fraud. If charities are not seen to be capable of protecting their own assets, the public may think twice before donating their hard-earned funds to support a charity, further impacting future charitable income.

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However, there are positive steps that a charity can take to reduce the potential impacts of a fraud on their reputation in order restore public confidence. For example:

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1)????? being upfront and open with both funders and beneficiaries about the steps taken to protect charity funds, whether through internal restructuring, recruitment or process and control reviews and enhancement;

2)????? taking proactive action against fraudsters whether through civil action, criminal prosecuting authorities or private prosecutions; and

3)????? seeking recovery of funds.

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Any of these actions will send the message that you are tackling the issue head-on, learning from the experience and moving on.

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Impact on staff, volunteers and trustees?

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There is a saying that ‘People make the place’: as you will be aware, a charity's culture doesn't exist without those who invest their time into it. That is why it is such a concerning metric that 45% of respondents to the Survey said that there was a loss of morale amongst its personnel as a knock-on effect of a fraud. In addition to a loss of morale, 21% reported that staff, volunteers and trustees had left their organisation in the aftermath of a fraud.

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These are disastrous consequences for charities. The increased focus by charities who have faced a fraud this year on managing the internal consequences, instead of external repercussions (such as the opinions held by the general public), is perhaps indicative of the level of vulnerability that charities are facing in retaining dedicated employees and volunteers.

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Some loss may be inevitable (and indeed necessary), especially if the fraudster was an employee or volunteer or those around them turned a blind eye to suspicious activity. However, a loss of faith in the ethos of a charity may also lead to volunteers becoming less willing to donate their time and, from experience, we know that people don’t like to work in difficult or dishonest environments where they see a blasé attitude towards serious risks such as fraud. In addition, trustees may leave if they feel the challenge of steering a charity through difficult times is too great, or if they feel their personal reputation may be tarnished.

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It is possible to manage morale and personnel retention following an incident of fraud with open, honest and positive communication from those in charge of the response effort. Taking actions to prevent future incidents of fraud also helps to focus minds on positive change and creates an optimistic future.

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Impact on charitable activities

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The worst-case scenario for any organisation facing a fraud would be a fatal loss of profit and/or reduction in cash flow, or the irreversible breakdown in a management team which forces a permanent wind up of operations. Whilst only 7% of charities who had suffered a fraud reported a closure, this is still a significant number of charities and the impact could be catastrophic for vulnerable people who, was it not for the fraud, would have stood to benefit from that charity.

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The closure of a charity clearly has wide-reaching consequences, as unlike a company where the most significant effect on stakeholders may be financial, the cessation of charitable activities can directly impact the quality of life of the people who depend upon them the most; and as such charities must be fiercely safeguarded against fraudsters.

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Regulatory action?

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Thankfully, this year, disciplinary or regulatory repercussions were not a reality for the respondents to the Survey.?However, the reality is that charities could have regulatory action imposed upon them resulting in further financial losses through fines, indirect financial losses through a loss of reputation or even be struck-off the charity register.

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Over the last decade, there has been movement towards imposing “failure to prevent” offences, firstly through the "failure to prevent" bribery offence introduced in the Bribery Act 2010, and secondly through the recent introduction of the "failure to prevent" fraud, false accounting, and money laundering offence, in the Economic Crime and Corporate Transparency Act (the ‘ECCT Act’). The ECCT Act is changing the landscape of corporate criminal liability, and will have an impact on larger charitable organisations that meet the criteria (i.e. an organisation must meet at least two of the following criteria: (i) turnover of more than ￡36 million; (ii) balance sheet total of more than ￡18 million; and/or (iii) more than 250 employees). Whilst there will be a defence based on “reasonable procedures”, for which we are awaiting guidance, charities will have to learn to adapt and adhere to these new and more strict requirements where they apply, and will be required to evidence their fraud risk management strategy. There is no doubt that regulators will be eagerly watching the charitable sector.

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Loss of data and assets

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Cyber breaches or attacks can be incredibly invasive and debilitating, and with cyber-crime growing there is an increased risk of charities losing access to their assets if not carefully managed.

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10% of Survey respondents noted that they had either lost access to data, had data stolen from them, or lost other assets such as intellectual or physical property.

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The loss of data and assets of any kind has the potential to disrupt the operations of a charity, potentially catastrophically. For example, by making a network resource unavailable to its users (temporarily or indefinitely), will severely impact a charity’s ability to deliver its day-to-day charitable activities, which could put vulnerable people at risk. It is vital that assets, in all forms, are closely guarded and protected.

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The ripple effect of fraud – help #StopCharityFraud

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In our experience, fraud can have a far-reaching effect across organisations in more ways than immediate financial loss. It can adversely impact staff, volunteers, beneficiaries, donors, and suppliers, if not dealt with appropriately.?Just because it might not initially hit the books and records, doesn't mean there won't be a cost to the charity. So, it is vital not to turn a blind eye to fraud’s non-financial consequences.

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If you would like to receive a full copy of the 2023 Charity Fraud Survey, please click here.

#StopCharityFraud.

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