Charities warned over inadvertent fraud

With the charity commission under growing pressure to bring to light charity fraud, malpractice or irregularities, it is up to voluntary organisations to look closely at their activities if they wish to avoid a run-in with investigators.

According to Stephen Lloyd, head of the charity department at law firm Bates, Wells & Braithwaite, voluntary organisations may often not deliberately breach charity law but instead are the victim of their own poor record-keeping or administration. For example, failure to submit accounts and annual returns is probably the most common reason for a charity to be investigated, he said.

"The inability to submit documents often indicates problems with record-keeping and administration and poor financial controls," said Mr Lloyd, who spoke about charity commission enquiries at a charity law conference organised by the Directory of Social Change last month.

Usually no penalties are imposed in these cases of failing to submit accounts on time, he said, although since February 2001 the commission has been "naming and shaming" persistent defaulters and may refer the matter to the police if a charity did not submit accounts for several years running.

In 2000-01 the commission completed 212 enquiries in total and in 90% of cases irregularities were corrected. Of those enquiries, deliberate malpractice accounted for 24% of cases, fundraising problems for 22% and maladministration for 43%.

The most common areas for charities to fall foul are unauthorised trustee remuneration and relationships with trading subsidiaries, said Mr Lloyd.

On unauthorised trustee remuneration, the commission has usually not made trustees who have been paid out of a charity's funds for professional services, reimburse the money, providing the charity can demonstrate that it received good value and that the payment was made in good faith.

In theory the commission can, however, require a trustee to reimburse funds going back many years and it is likely to impose sanctions if the unauthorised payment was made to a "professional" trustee, such as a solicitor, who would be expected to know better.

On relationships with trading subsidiaries, Mr Lloyd highlighted one case in which a trading company supplied management services to the charity for a fee but no formal arrangement or contract was in place. There was also a lack of tendering process and documentation detailing how charges were assessed.

The commission found there was a conflict of interest as some of the trustees were also directors of the company and, following the enquiry, the charity agreed to put in place a contract and a trustee employed by the company resigned from the charity.

Mr Lloyd suggested a checklist approach for charities seeking to minimise the risk of irregularities. Such a checklist should include:

· Always file accounts and annual returns on time and make sure they comply with the charity statement of recommended practice (Sorp) accounting guidance

· Make sure you have clear financial procedures and management controls and that these are in writing

· Have written procedures governing staff responsibilities and employment issues

· When ending a relationship with a commercial participator always inform them in writing

· When getting advice from the charity commission it is advisable to write to them rather than relying on the telephone helpline, which can be a less accurate source of guidance

· Always check the charity's governing documents authorise it, if you are considering payment to trustees for professional services.

If a charity is investigated by the commission it is best for trustees to be as co-operative as possible.

Mr Lloyd said: "The commission certainly notes in its reports where the trustees have been co-operative and often states that as a result it is confident that the charity is moving in a positive direction and closes the enquiry with no further sanctions imposed save monitoring."