Another practice of many churches plays right into one of a fraudster’s strengths, the ability to withhold information. Perhaps in an attempt to avoid interminably long finance committee meetings brought on by micro-managing members, or more likely, fearful that the messenger is going be killed, some church administrators tend to hold back on the financial facts. Key: Failure to present full-disclosure financial statements is the most common way of holding back information.
Instead of traditional financial statements, a church may elect to present summary information in an attempt to control the facts. Making matters worse, they may also use electronic spreadsheets to do the work. Although spreadsheets are very powerful and useful, they have one major flaw: the preparer is in total control over what goes into the report. There are no balancing requirements as with a normal set of financial statements based on a double-entry accounting system. Some crooks have one word to describe this situation. Disneyland!
Financial statements are simply another form of communication used to convey the financial situation of the church. Their goal, in the church environment, is to answer a few basic questions:
- How much cash do we have on hand?
- Is any of it restricted?
- What kind of assets do we own?
- Who and how much do we owe?
- How did we do this year?
- Did we stay within budget?
Key: To answer all of these questions adequately, a church must present a full set of financial statements. This includes at a minimum, both a balance sheet and an income statement. (These are business terms; the corresponding non-profit titles are statement of financial position and statement of activities, respectively.) In addition, if a church has a high volume of restricted activity, a separate schedule of restricted gift activity should also be presented.
Not only does “summary reporting” result in an uninformed church. It can also result in a victimized church. A church with a history of being satisfied with summary reports combined with poor personnel decision-making may end up with an embezzler having the best of both worlds; being able to take what he wants from the church and covering up the evidence with his own reporting system.