Fraud on the Rise in Not For Profits

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Fraud on the Rise in Not For Profits

Handcuffs frame the word 'fraud' among newspaper cuttings

Funds lost through online fraud in the Not for Profit sector is at an all-time high, with fraudulent online transactions resulting in almost 40 per cent of the total value of sector fraud reported, according to the 2012 BDO Not for Profit Fraud Survey.

Australian and New Zealand charities lost a total of $2.9 million in fraud cases involving everything from cash theft, payroll fraud, credit card fraud and online fraud.

Some 645 charities took part in the survey and 75 organisations suffered 330 frauds in the past two years.

The average fraud being $8,838 and of those respondents who experienced fraud, 49% had suffered fraud previously.

The most common fraud was the theft of cash, followed by payroll fraud and credit card fraud.

Most alarmingly the report says that the majority of frauds were not reported to police.

A typical fraudster was a female aged in her forties and was a paid employee in a non-accounting role.

BDO Forensics Services Partner David Williams said that while overall reported fraud within the Australian and New Zealand Not for Profit sectors has decreased, the amount of funds stolen through online fraud has significantly risen.

NDIS Criterion
Online fraud amounted to $1.11million being stolen from three charities- making the the average theft around $370,000.

“Since the inception of the fraud survey in 2006, there has been a gradual decline in the number of fraud cases reported, with 12 per cent of organisations reporting a fraud in the past two years – down from 19 per cent in 2006,” Williams said.

“While the most common type of fraud was still cash theft (40 per cent), it is online fraud which is proving to be the most devastating.

“With the average online fraud costing $370,000, online payments accounts for nearly half of the total value of fraud committed within the Australian Not for Profit sector.

“Given the prevalence of online banking, perpetrators can transfer large amounts of funds online very quickly and easily,” he said.

While the majority of respondents (86 per cent) agreed that fraud is a problem for the sector, only 8 per cent of respondents believed fraud was a problem for their individual organisation.

“Fraud is an issue that affects every organisation, whether they are corporate, government or Not for Profit.

“Not for Profits need to be wary of having an ‘it won’t happen to us’ attitude and should always maintain a pro-active approach toward fraud and fraud prevention at all times,” Williams said.

Williams said the potential impact fraud can have on an organisation can be severe, particularly on the organisation’s public reputation which can impact future community support.

“Generally, the funds that are removed by a perpetrator come directly from an organisation’s bottom line. Most of these stolen funds are never recovered,” Williams said.

“With 46 per cent of respondents indicating that even a ‘small fraud’ of less than $10,000 would have a major impact on their organisation, it is crucial that appropriate internal controls are in place to minimise the risk of fraud,” he said.

The survey found that the average duration of each fraud was 14.5 months, with the majority of fraud committed by paid employees.

“Fraud poses a significant risk to Not for Profit organisations, but this risk can be mitigated by implementing policies and procedures to prevent, detect and respond to fraud,” Williams said.

“Tip-offs from employees, volunteers and other parties accounted for approximately 34 per cent of the total number of frauds discovered. Therefore, it is absolutely crucial to implement effective whistleblower services and policies to help detect fraud” he said.

Other key findings from this year’s survey include:

12% of respondent organisations suffered fraud
25% of respondents who experienced fraud believe that some of the fraud it is still undetected
40% of all fraud reported within the sector was cash theft
9% of frauds were committed by volunteers
The average online payment fraud was $370,000
The average duration of each fraud was 14.5 months
Tip offs (34%) and internal controls (33%) were the most effective ways of discovering fraud.
The BDO Not-For-Profit Fraud Survey provides a benchmark for Not for Profit organisations revealing the perception and level of fraud in the sector, examining specific incidences of fraud and what the sector is doing to prevent fraud occurring.

The full report is available on the BDO Australia website.

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