Detecting Fraud in NFPs Shouldn’t be a Game of ‘Moving Statues’

Opinion: Why do Not for Profit boards need to get proactive about the risk of fraud, writes author and global fraud expert Oliver May.

A few years ago, I met a director of a major Australian charity to discuss their counter-fraud framework. Over coffee, she laid out a sheaf of documents on the table. There was a response plan, an investigation manual, policies, procedures – it all looked great. I asked her how many cases they had. “None,” she replied.

The story is the same with most charities, Not for Profits and NGOs with whom I engage, whether they’re in Australia or elsewhere. They don’t detect much fraud. And this is where many boards stop – no fraud is good news. The standpoint of these boards is fundamentally reactive.

The problem is that fraud and corruption hide and masquerade. The absence of detection does not mean that there is no fraud to detect. Imagine the old schoolyard game “moving statues”, where the child who is “it” stands with her back to the other kids as they race towards her. When she turns to face them, the kids have to freeze – any kids still moving are out. As soon as a board’s focus turns away from fraud, the yard is clear for fraudsters to move.

In fact, the risk of fraud in Not for Profits – especially from their own staff and volunteers – may be considerably higher than many think. My book outlines some of the factors elevating that risk: cultures of trust, operational stretch and the dynamism created by variable funding all play a role. When we unpack factors like these, together with contemporary research – a recent study, for example, estimates the loss to fraud in the UK charity sector at 2.5 per cent of its income – then that lack of detection looks less encouraging.

In this context, detection should be less alarming than non-detection, and failing to detect any suspected fraud might be a signal to the board of the need for a change in approach – from reactive to proactive. If fraud tries to hide, then boards need to give chase. And there are some exciting techniques out there – perception-based data (such as anonymous staff surveys) and representative sampling can help to show us where the vulnerabilities might be. Benchmarking, sector forums and research can also inform that analysis. The key is for boards to adopt a “holistic” model to tackling fraud.

A holistic model means that we do not just rely on preventative procedures and reactive investigations. It means that we place detection activities (such as reliable whistleblower mechanisms, information-sharing agreements and proactive examinations) within a coherent framework: including work to deter, prevent and respond to fraud, underpinned by enabling activities (such as leadership and communication), sited within organisational cultural development and a framework of strategic management. If this sounds expensive, it shouldn’t – these components are scalable. A Not for Profit needs work to develop its internal culture, whether it has 10,000 employees or 10 – that work just looks different.

Taking a proactive approach puts us in a better position to build donor and public confidence. The crash in public trust exhibited in the UK’s charity sector should tell us that public confidence cannot be taken for granted and is vulnerable to scandal. Research shows a rising focus on fraud and corruption stories in the media.

But considering reputational risk only when we have detected a fraud is a mistake. Actually, to truly reduce reputational risk, our effort needs to be deployed much earlier on – both lowering the likelihood of those scandals, and enabling us to reassure our supporters that we do so. The reputational risk we need to think about is the risk of being unable to articulate meaningful effort to deter, prevent, detect and respond to fraud and corruption.

A proactive approach, also, of course, means unlocking a range of immediate benefits. Although the reduction of loss means greater resources for our programs, there are others too. Good counter-fraud behaviours such as due diligence and operational planning are often concomitant with improved programme quality, while showing our staff and volunteers that we take fraud seriously improves their confidence in us – arguably improving productivity.

In 2014, the professional services firm BDO conducted a survey of the Australian Not for Profit sector, finding that although 90 per cent of respondents considered fraud to be a problem for the sector, only about one-quarter considered it to be a problem for their organisations. Perhaps it is time for the remaining three-quarters to turn round, look more closely for those “moving statues” and reap the benefits of challenging them.

About the author: Oliver May is the author of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector. He was the head of counter-fraud for Oxfam GB and blogs on fraud and corruption at Second Marshmallow.