A global charity case: examining the impact of financial reporting on fraud

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November 22, 2019

A global charity case: examining the impact of financial reporting on fraud

By Ian Carruthers

Director Standards Chartered Institute of Public Finance and Accountancy (CIPFA)

Originally published 25th October 2019 on Public Finance International.

This week is International Charity Fraud Awareness Week, which has brought industry professionals and stakeholders together to share best practices and increase awareness around financial crime in the non-profit sector.

It’s clear that fraud can happen in any organisation, regardless of sector or industry, and non-profit organisations are no exception. What’s even clearer is that when accountability and transparency is not as good as it could be in an organisation, fraudulent activity can be shaded, making it a substantial challenge to detect and prevent. So what can we do to address this situation in the non-profit sector, and ensure we reduce the prevalence of fraud?

Transparency and accountability are important principles if organisations are to function effectively and efficiently. Given the reliance on donations and voluntary work to deliver services, having clear and consistent documentation of financial income and expenses is crucial for charities. Transparent accounting can improve operational efficiency, shed valuable light on financial sustainability and help attract additional charitable donations.

However, as it stands, for an increasing number of charities operating internationally, the lack of an international financial reporting standard means these principles are at risk and, if we look internationally, underdeveloped. The same is true for a local charity that receives a one-off donation from abroad or a multilateral organisation with operations in 50 countries.

The absence of a comprehensive, detailed international financial reporting standard means that for many global charities, financial reporting processes can be rife with inefficiencies, inconsistencies and inaccuracies. It’s this week in particular that I’m mindful that there are always people who will manipulate, move and steal money for their personal gain.

The absence of internationally recognised accounting standards for NPOs, together with opaque, inconsistent financial reporting methods in different countries creates a perfect storm ripe for exploitation by fraudsters. I find it even bleaker when considering the vulnerable individuals and communities affected by this activity. That’s why CIPFA is teaming up with Humentum to develop the first-ever global financial reporting guidance for NPOs.


'The absence of a comprehensive, detailed international financial reporting standard means that for many global charities, financial reporting processes can be rife with inefficiencies, inconsistencies and inaccuracies. It’s this week in particular that I’m mindful that there are always people who will manipulate, move and steal money for their personal gain.'


The International Financial Reporting for Non-Profit Organisations (#IFR4NPO) initiative is a joint five-year project designed to bring clarity and consistency to the global NPO sector. It will design a single set of guidance supported by the accounting community, governments, regulators, NPOs and funders. For many, the initiative’s guidance is greatly welcomed because it will provide a strong basis for comparison between jurisdictions, encourage greater harmonisation of funders’ requirements and ensure stronger financial management.

But the implications for counter-fraud are equally significant.

A single set of international financial reporting guidance means that NPOs will be able to report the same financial information, in the same way, at the same time, regardless of country or location; effectively closing the vast network of inconsistent gaps that make it difficult to find, prove and correct instances of fraud.

This future framework of consistency will make the finances of international NPOs that much clearer; that much more transparent for increased levels of internal and external scrutiny and auditing. Furthermore, the uniform #IFR4NPO guidance will set a global standard of ‘what good financial reporting for NPOs looks like’, and the ability to hold people accountable will be that much easier.

The development of international financial reporting guidance will have positive reverberations beyond organisational efficiency. Once new guidelines are applied, many current issues in accountability and transparency that international non-profits experience will be significantly improved, making financial crime that much harder to commit within international NPOs.

The global non-profit sector, and most importantly the vulnerable communities it serves, stands to gain the most from the implementation of new standards and the subsequent change in culture that will inevitably follow.
 

Find out more about IFR4NPO here

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