Mark Jenner & Co – Forensic Accounting Services

There appears to be a greater risk of charity fraud than corporate fraud. The reason for this is potentially because the culture within a charity is profoundly different to that within a company. A charity is a good cause, it does not have the same drive to make profits as a business. Yes, it does want to raise money, but the control over doing so very often lacks commercial awareness and leads to charity frauds.

Charity fraud can therefore arise because the organisation concentrates on raising money, and ignores the staff member who sees an easy way to steal money from the unsuspecting good cause. It can also arise because the fraudster can see the inherent inability for decent people to say “no” when asked to contribute to a good cause.

The latter form of charity fraud is the most prevalent, whereby an individual or group of individuals set out to defraud the donors of funds to the charity. There have been many serious fraud cases in recent years where somebody, often a man and his wife or other family members, set up a charity initially to serve a good purpose. Then they see how easy the money is raised and even easier for them to spend unchecked. As their lifestyle increases in luxury, so do their “business expenses” taken from the charity funds. I remember dealing with one such case where a couple travelled to Florida regularly under the pretence of arranging “once in a lifetime” holidays for terminally ill children. In reality they were spending their time on holiday and were even arranging the purchase of a holiday home for themselves – all using charity funds.

Charity frauds or, more appropriately charity scams, are often perpetrated by support publishers. These are publishing businesses set up as get rich quick schemes by unscrupulous fraudsters who do not mind using the names of charities or other good causes in vain to get people to part with their money. A telesales operation, support publishing companies are often run from a home office, or even in a couple of cases from the con man’s bedroom. The opening call to unsuspecting small businesses and sole traders might take the following line:

“Hello, we wondered if you would be interested in advertising in the Good Cause Charity’s Child Safety Booklet? This is a sound commercial platform for your business as we will be distributing 20,000 copies in your post code area and you will be helping in the worthy cause of Child Safety being run by the Good Cause Charity. We can do you a half page advert for only £250 today…”

Sometimes the caller will say “Thank you for advertising last year in…(some good cause publication)…this year we are running…(a different campaign)…” The unsuspecting customer cannot remember advertising last year but decides that if another member of staff did it last year it must be fine to repeat the exercise now. It is very difficult for somebody to decline such a request.

Sometimes there is a publication and sometimes money does go to a charity. However, under the Charities Act any publication must clearly say which charities are supported and how much of the funds raised goes to each charity. In practice these support publishing scams only circulate the publication to each advertiser (to satisfy the people funding the adverts that the publication is real) and little if any of the funds raised goes to the good cause! The money pays the staff and overheads and often keeps the company directors in a very luxurious lifestyle.

Charity frauds such as these are prevalent in the UK. No sooner do the authorities close one down but another one opens. The business is easy to run and telesales operatives work on one for a while, realise that it is an easy way to make money, then set up on their own. There is a pool of operatives based primarily in the North West of England that support these charity fraud scams, moving from one to the other as they close down and start up again.

The lesson to be learned is to be a little more cautious when making a donation to a charity. Make a point in selecting only those charities you are happy to give to and try to politely explain this to hopeful approaches. At least state categorically that no donations will be agreed to unless detailed paperwork is sent through the post. Then at least you can check to see if the charity is bone fide and that it does endorse the booklet (or diary or wall planner etc) that is being published.

Investigating a charity fraud is no different than investigating any other form of fraud. One of the key characteristics that I have found it a good idea to look out for charity principals taking cash from the revenue without paying tax. This is often facilitated by adding fictitious employees to their staff lists. This scam is aided by the fact that many such organisations are set up to collect donations or advertising money using telesales operatives, often employed on a self employed basis. It is easy to add a name to the list of operatives and take the cash for yourself!

Tax evasion as described above is more common than people realise. There is a vast “black economy” operating behind the scenes within the UK, USA and all other countries where you least expect it. Read more about this within my Tax Fraud articles.

A fraud can be uncovered in a number of different ways. A good example is by a whistleblower who who might inform his managers that a colleague has been fraudulently stealing from the company. Such a corporate fraud will need to be investigated in order to prevent further losses, find out how it happened in the first place and to try to recover the stolen assets.

A specialist fraud investigator is needed for such a task and it is very common for the victim company to enlist the assistance of a qualified forensic accountant experienced in fraud investigation. Such a person will be accredited to investigate a fraud and may be a Chartered Accountant or a Certified Fraud Examiner with possibly other qualifications – together with years of experience dealing with such fraud cases.

Every fraud is different. There are different characteristics to be found between bank fraud, supplier fraud and mortgage fraud. Even within these categories there are many possibilities because the fraudster is very resourceful in seeking out new and different weaknesses in a business.

The fraud investigator will approach the corporate fraud by first determining what the organisation wants to achieve. The priority might be to get the money back or the victim company might want to make an example of the fraudster as a lesson to others. If it only wants to get its money back it may not want law enforcement involved. A police fraud investigation might disrupt the business or cause its reputation to be damaged and there is no guarantee that the business will achieve any of its own priorities. For example a bank might want to sack the employee and stem the leak of losses, and not want the general public to know that it had allowed a fraudster to work in its midst.

The forensic accountant or certified fraud examiner will want to agree the desired outcome of the matter with management and develop an investigation strategy based upon the organisation’s own fraud response plan. It may be possible to interview the whistleblower early on to get a quick “heads up” into what was going wrong before beginning a detailed analysis of the accounting records, interviewing staff and making other enquiries often outside the organisation. In some circumstances it may be necessary to carry out a preliminary covert fraud review, in the evening or during the weekend when employees are not present.

For the actual mechanics of the investigation the forensic accountant will most likely want to follow the trail of the stolen money. “Follow the money” will be the primary goal in such a forensic audit as this will provide not only a chance of getting the money back, but also evidence of why and how the fraud took place.

The losses need to be quantified exactly, with evidence showing how they occurred. In a fraud, this evidence is crucial as the complexity of financial transactions can obscure what has happened and cause the matter to become protracted. If the victim is unable to demonstrate the loss clearly, the perpetrator is more likely to escape punishment or having to return what he has stolen.

The accounting evidence must be presented clearly, for use in negotiations, arbitration or use in litigation. It may also assist in any criminal action that does take place.