Despite increasing public attention and media coverage of fraud, no solution to this problem has been designed specifically for the not-for-profit sector. This study focuses on charities in England and Wales and examines variables derived from a content analysis of 42 fraud and 42 no-fraud charities' annual reports and financial statements. We use logistic regression to explain and predict fraud in the charity sector. We examine whether a range of governance-type variables are significantly related to the likelihood of fraud in (...) charities. We find that smaller boards, which imply a small cosy environment for governance, are associated with a greater likelihood of fraud, suggesting that larger boards enhance monitoring in the not-for-profit sector. Also, a low or zero-level of grant funding is associated with a greater likelihood of fraud, implying that monitoring by long-term donors is also important in curbing fraud. (shrink)

The theorisation of fraud has largely been developed in the for-profit sector, and the paper extends this to the not-for-profit sector. Motivated by social control theory, we adopt a qualitative approach to assess the views of key charity stakeholders (social control agents) of charities registered with the Charity Commission for England and Wales about fraud. We find that stakeholders, especially donors and beneficiaries, are often reluctant to label ‘fraud’ as a threat to the sector. This reflects ‘trusting indifference’, a value (...) embedded in the sector that brings more harm than good to the sector in terms of wrongdoing, by hampering effective social control. Adapting existing theories of fraud to charities, we propose a ‘fraud tower’ with three layers: the social layer (trusting indifference), organisational layer (opportunity), and individual layer (fraudsters-opportunity seekers). (shrink)