In December, an outfit called the True and Fair Foundation drew the ire of the UK third sector with a report attacking the amount spent on ‘charitable activities’ versus other spending such as ‘overhead.’ The analysis was flawed (Pesh Framjee comprehensively dismantles it here), but the incident was notable as yet another attack on NGOs which played to the idea that costs not seen as directly related to delivery are wasteful at best and, at worst, self-serving. It is a notion that some researchers have argued leads to a ‘non-profit starvation cycle,’ pushing non-profits into a race to the bottom for lower and lower declared overheads.
Proponents of the drive for ever-lower ‘overhead,’ ‘administration’ or ‘support’ costs are often unclear (or contradictory) about what expenditure is actually meant. The impact of the drive is that many NGOs are incentivised to cut to the bare bone anything with a whiff of ‘support cost,’ and which cannot be said to directly relate to delivery. This can include finance, human resources, IT, investment in systems, supply chain management, procurement, wider logistics and other costs.
This has a range of consequences for the effective operation and development of NGOs, but a particular ramification is the increased vulnerability to fraud. Anecdotally, my NGO counter-fraud colleagues and I rarely see a case of fraud or corruption where significant improvements to prevention – that is, having policies, procedures and systems, proper management oversight, the independent review of both, and a coherent risk management framework – would not have significantly reduced the chances of it happening. An example might be World Vision’s experience in Liberia, where staff stole approximately $1m of food and construction materials. World Vision’s statement following the case listed a number of changes in the wake of the fraud.
Key ways that NGOs can more effectively prevent fraud and corruption, thus living out the stewardship that their donors and supporters expect, include:
- Conducting fraud and corruption risk assessment before and throughout a project;
- Performing due diligence on new staff, contractors, consultants and local partners;
- Designing, implementing and complying with robust systems of financial control;
- Conducting proper checks before authorising expenditure, and keeping accurate records of stock movement;
- Utilising electronic systems where possible, making funds and stock easier to track;
- Properly monitoring and evaluating projects;
- Training staff and managers in how to identify and respond to the signs of fraud and corruption.
What becomes clear, of course, is that many – if not all – of these require investment in what some might think of as overhead, administration or support costs. Conducting checks before authorising payments, for example, requires staff to do it. As they say in the theatrical industry, it’s about ‘bums on seats.’ Both the bum, and the seat, are support costs.
This narrative, and the resultant dynamic, can leave NGOs who respond to it more vulnerable to fraud and corruption. The damage is not just limited to prevention, either – it also impacts upon detection. Because fraud and corruption are designed to hide, they are unlikely to be picked up without investment in the systems and functions to do so. This contributes to the ideal conditions for fraud. The idea that low overhead, administration or support costs automatically mean greater resource for delivery is immediately debunked – because without them, at least some of that delivery can be happily and secretly stolen.
Ironically, of course, a driver behind the flawed narrative is a desire to see good stewardship in NGOs. But in the same way that it would not represent good stewardship for a fire department to send firefighters into burning houses without protective clothing, it does not represent good stewardship for charities to move resources around without sufficient protective systems clothing those resources. Although there is, of course, a balance to strike – enormous overhead, administrative and support costs are a red flag – under-investment in prevention, and the infrastructure that makes prevention happen, is a key enabler of fraud and corruption for NGOs.
Five suggestions to change the dynamic
- Reduce the extent to which your NGO fuels the paradigm. Avoid semantic games and creative reporting about what costs are, and are not, ‘delivery’ or ‘administration.’ Be clear in reports about what broad terms mean;
- Celebrate the value of ‘support-side’ work. Supporter marketing usually focuses on delivery activities – consider promoting and explaining the powerful contribution made by what might be thought of as ‘administration’. Delivery happens because of support costs – not in spite of them;
- Educate courageously in the public space. The Charity Defense Council (of which Dan Pallotta is a director) in the US is a good example of clear and determined voices tackling the pressure on charities;
- Take every opportunity to claim ‘support-side’ funding. Where institutional donors make funds available for support costs, use them. If funding is available for a compliance officer, for example, employ one!
- Invest in ‘overhead’, ‘administration’ or ‘support’ in the first place. These expenditures may not come with the inspiring business cases or immediate sense of reward that programmes might, but they are no less vital for making sure that those programmes happen, and that they are the best and most sustainable they could possibly be.
Find out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!
4 thoughts on “Mind your head: How the push for low overheads in charities raises the risk of fraud”
Some of us have been concerned for years about NGOs being forced to reduce or even operate without “core” costs, which I think is a better name for essential operating costs. Now I am the first to support the notion that the sector has a history of inflated costs – disporoprtionately high salaries and fringe benefits for some; luxury air-conditioned offices and vehicles, etc. (Donors have not yet given up on these!) And local or domestic NGOs are much less likely to manifest such frivolities, i.e. not needed for the real work of helping the poor, than international NGOs and Agencies. However, there is no doubt the cut is too deep. Some donors even regard core costs as a mortal sin. One recently, well in to that mode of insisting on their money being used for activities only, even turned down our proposal because it was not “sustainable”! So they expected other donors to pick up the tab but for them to continue to claim the benefits. Now as this process of cutting core costs has proceeded over the last decade, “creative accounting” has developed to disguise and misappropriate how funds are used, to replace some of it. Yes, it can be fraud. But it is also “unauthorised virement” and if it is a switch from one legitimate budget to another, it may not be a crime even if it is breach of contract. The point is NGOs cannot function properly without some core costs. In fact donors have put more pressure on NGOs because of the open call for proposals system. Here in Cambodia I see many donor announcements – “We have selected 8 from 300 applicationd for funding”. That means 292 NGO staffers wasted a week or more of their time trying their best to win the new funding, time ultimately wasted, and time that could have been spent more productively working directly with their beneficiaries for better impact and outcomes. So donors do have think again about core costs, and if that means the great charity-giver and taxpayer publics need educating, then we must do that to end their misunderstanding. Core costs can be “value for money” as well as a worthwhile investment. Unless we do this, what some of us see (and have measured) as very high levels of fraud and unauthorised virement, will indeed threaten the continued existence of NGOs doing great work that nobody else can do.
Hi John, thanks so much for reading the article and sharing your thoughts, many of which I recognise and sympathise with. One of the points you note about local/national NGOs perhaps being less likely to manifest certain expenses that INGOs do, really resonates with me – there may be a good case to be made that in several ways, local organisations (traditionally seen as high risk to INGOs/donors) may in fact be capable of greater fraud/corruption resilience than them. With a few changes to the way that funding works, this could be realised.