Keep sharp eye out to prevent fraud

Fraser Lellman and Bernard Lamusse.

The not-for-profit sector plays a critical role in serving the community, but often lacks expert leadership at board and management level to address issues such as potential fraud, says BDO Tauranga managing director Fraser Lellman.

BDO Tauranga ran a seminar this week which drew around 50 local not-for-profits (NFP) which heard about the significant increases in compliance regulations, high competition for funding and the risk of online fraud that the sector faced.

Mr Lellman, who co-presented the seminar with BDO Waikato partner Bernard Lamusse, said there were many local not-for-profits covering a variety of church, marae, sports, welfare and community groups.

"Probably the single biggest issue to face NFPs in the next two to three years is the raft of new regulations they will need to comply with from financial reporting through to health and safety," said Mr Lellman.

"Most NFPs don't consider health and safety a major issue, but without reviewing the impact of their activities and condition of assets on health and safety, they could face serious consequences. This results in a tendency to rely on internal controls and trust as a form of prevention."

However, said Mr Lellman, it was people in positions of trust who were the main perpetrators.

"There's often thousands of voluntary hours involved and a lot of individuals are put in positions of trust," he said. "But it can be a resourcing issue to get proper structures in place."

Electronic fraud is also a significant risk, enabling huge amounts of money to be siphoned off. In one reported case an online payment fraud was for $960,000.

"Again the data confirms that robust risk management significantly reduces fraud with those organisations that do have a risk management framework experiencing an average fraud of $5571, compared with those that don't suffering an average fraud of $57,338.

"It is vital that not-for-profits understand their susceptibility to fraud, rather than taking an 'it won't happen to me' attitude."

BDO risk assurance partner Andrew Sloman said there was a wide range of other risks not-for-profits need to monitor and mitigate or face reputational damage and consequential demise in funding.

"There are critical areas such as data management and privacy along with service compliance for those NFPs working in health or social service lines where inappropriate management and non-compliance present significant risks," he said.

"Our key message to NFPs and the people who are their leaders is that these uncontrolled risks must be monitored and mitigated and if they're not, they should be keeping them awake at night."

At a glance
• The latest BDO Not-for-Profit Sector Fraud Survey found that while 90 per cent of respondents saw fraud as a problem for the sector, only 28 per cent believed it was a problem for their organisation.

• Thirty per cent of the largest fraud incidents reported have involved collusion and of these, 31 per cent involved a board member.