Without question, this is the most frequent question of all. It is also one of the most important because it involves one of the current “hot-button” issues as far as the IRS is concerned. If a church or exempt organization is not careful, it can stumble into some very significant IRS penalties (often called Intermediate Sanctions).
The answer to how these transactions should be handled is fairly simple – adopt a written accountable reimbursement plan which establishes the processes by which employees and volunteers will be reimbursed for expenses they incur on behalf of the church.
To avoid problems, the church should make sure that its policy conforms to IRS regulations by:
- Establishing the business purpose of the transaction
- Adequately substantiating the expense with expense reports and vendor receipts
- Requiring that any excess be returned
Also, the church’s policy should dictate that all of the above be accomplished in a reasonable amount of time. The most common method is to require that:
- No advances can be paid to individuals more than 30 days in advance of an event
- Substantiation must be presented within 60 days of the employee’s incurrence of an expense
- Any excess advanced over the amount spent on a project be returned within 120 days
If our answers only raise more questions (which is typical for CPAs) feel free to post a question on the blog or email me at verne.hargrave@pskcpa.com
Our busy season is winding down. Although many churches have changed their year-ends from December 31st, the vast majority are still locked into the calendar year. This results in a “crunch time” from March 15th to April 30th around PSK.
During the course of this heavy load of engagements our auditors are asked many questions by our church clients. Interestingly, most of the questions have little to do with auditing or accounting rules but instead are concerned with basic issues that church business administrators face on a day-to-day basis.
Rather than let our answers help only the ones who asked them, we have decided to share this information with our blog readers. Over the next few weeks we will discuss a variety of issues from accounting processes to IRS compliance issues. Hopefully, this will prove helpful.
But, if our answers only raise more questions (which is typical for CPAs) feel free to post a question on the blog or email me at verne.hargrave@pskcpa.com
According to the Association of Certified Fraud Examiners, the second most common red flag is financial difficulties of individuals involved in financial matters of an organization. The occurrence rate of 36% consists of reported frauds at all levels of the organizations victimized. However, if we look solely at frauds committed at the employee level (disregarding frauds committed by managers) the rate soars to almost 50% of all fraud cases.
This makes sense because employees receive lower compensation compared to the management level. When unexpected financial events occur, they are less likely to have a “rainy-day fund” set aside to get them through. This can lead to poor judgment in several areas, the first of which is usually excessive use of credit cards. When these individuals find it difficult to climb out of their debt problem and they might focus on other areas of relief, one of which is their employer’s money.
Once again, I must stress that the presence of these circumstances is proof of nothing, but organizations must keep in mind that personal financial difficulties are a common denominator in a great many fraud occurrences. But, how can a church leader address this possibility? Here are three thoughts.
- In addition to performing the normal background check, a church might consider performing annual credit checks on employees involved in the financial activity of the church. It is not too much of a stretch to say that if you hire someone with a poor credit history, you have hired their problems as well. Keep in mind, that credit checks generally require the employee’s permission
- Provide financial counseling for employees. This is another way to discover if any employees are struggling with finances. But it also helps the church relieve some of the pressure an employee may be experiencing by providing a way out of their dilemma.
- Finally, and most importantly, you must close down the opportunity of fraud. In most of the church fraud cases I have read, the most common characteristic is terrible segregation of duties. Often, one person is in charge of all of the church’s financial tasks. When you combine these two ingredients: financial troubles and total control of a church’s financial activities….
Well, you can guess the rest.
I doubt that Oscar Wilde had church fraud in mind when he penned these words, but they do describe the nature of many embezzlers. Occasionally, the irresistible temptation to treat themselves to luxury items overrides a thief’s need to keep hidden. Ultimately, this inability to resist temptation brings unwanted attention to the culprits in the form of things like fancy cars and exotic travel. For example, several years ago a treasurer of a church organization was convicted and sentenced to five years in prison for embezzling more than two million dollars. Infuriated by what the judge termed a “spurious psychiatric defense”, the judge went on to describe the treasurer as a “common thief” who looted church funds “to live the life style of someone she was not”.
Employees suddenly and unexpectedly living beyond their means can be significant red flag. In fact, according to one report, this situation is the most prominent red flag, present in more than 43% of reported cases.
However, we do need to be careful with this red flag. An employee suddenly living above his means is not proof that fraud has taken place. Some people do have rich relatives who leave them money. (Just not in my family…)
Weeds in the Garden’s Verne Hargreave spoke on Church Fraud Deterrence at RockPoint Church in Flower Mound Texas.
Here is a great article outlining the highlights…
Typically there are three ingredients that must be present in order for a fraud to take place. Commonly referred to as the “Fraud Triangle” these three ingredients are:
- Pressure – Forces playing upon individuals in positions of financial responsibility that would make them begin to contemplate doing something they otherwise would have never considered. Frequent types of pressures are unexpected medical costs, job termination or business reversals of a spouse, addictions and a need to “keep up with the Joneses”.
- Rationalization – The self-talk perpetrators engage in to convince themselves that what they are about to do (or are already doing) is ok. For example, the number one rationalization is “I’m not stealing; I will pay it all back.”
- Opportunity – The ability to take advantage of a church without getting caught. Sadly, the most common opportunity for fraud in the church environment is the situation where one bookkeeper has total responsibility for and access to the church’s accounting system.
Generally, a church business administrator has significant control over only one of the Triangle’s legs; Opportunity. Unfortunately, much of the influence of the other two legs, pressure and rationalization, are out of a church’s control; a church has very little influence on outside economic pressures its staff faces. And, a church has virtually no control over the thought processes of its employees and volunteers.
Key Point – But, there is one thing that can be done – A Church Business Administrator can (and should) become a keen observer of his or her staff and volunteers.
Every two years the Association of Fraud Examiners (ACFE) publishes its Report to the Nations. In this document, the ACFE summarizes data compiled from fraud incidents reported to it by member Certified Fraud Examiners. One interesting part of the 2010 report is “Behavioral Red Flags”. These red flags were compiled by victims of fraud, who on reflection recalled certain behavioral changes on the part of the fraudster. Unfortunately, if these red flags would have been noticed earlier, the frauds could have been curtailed at a much earlier stage.
In our next series of posts we will share a few of the most common red flags.
VIRGINIA BEACH, Va. — A former financial officer has been sentenced to four years in prison for embezzling more than $280,000 from a Virginia Beach church.
Michele Moeser Roberts pleaded guilty last December to felony embezzlement. Prosecutors say the 62-year-old Roberts wrote herself checks and gave false financial statements to the treasurer at Kings Grant Baptist Church.
Media outlets report that Roberts was sentenced Wednesday in Virginia Beach Circuit Court. Judge Leslie L. Lilley sentenced Roberts to 20 years and then suspended 16 years of the term. Roberts also must make restitution.
“Woman gets 4 years in prison for embezzling more than $280,000 from Virginia Beach church.” – The Republic
Published: 21 April 2011
Web accessed: 21 April 2011
Affinity fraud, a type of investment fraud that preys upon members of identifiable groups, is an epidemic that is spreading throughout America’s churches.
Pat Huddleston, former enforcement branch chief for the Securities and Exchange Commission (SEC), points out that “there is an element of the pitch to a Christian that isn’t present in other pitches by scam artists, and that is the proposed shared faith between the person pitching the investment and the eventual victim.”
Of the $40 billion Americans lose to investment fraud every year, Huddleston reports that $1 billion involves fraud against the faithful. He believes megachurches are “especially vulnerable” because of their size and the number of ministries they may offer.
“Typically what happens is the scam artist will join the church [and] serve for a while,” the investor fraud expert explains. “The people who encounter them will be convinced that they are humble servants of Christ, and thereby, they gain the trust of the people they come in contact with.”
Next comes the scam artist’s subtle pitch that may include a casual conversation about what he or she does for a living, which is usually when he or she mentions that a contribution to the church was made possible through an investment. So Huddleston advises people to stay away from any investment pitch, even one that is made through a subtle appeal to a believer’s faith.
“Church An Easy Target for Scam Artists” – Chris Woodward, OneNewsNow
Published: April 20, 2011
Web accessed: April 21, 2011
For the complete story, click on the following link:
http://www.onenewsnow.com/Culture/Default.aspx?id=1332366
Dante DeMiro, age 43, was the founder and managing director of MuniVest Financial Group and MuniVest Services LLC in Southfield, Michigan, where he served as an investment adviser to various municipalities, credit unions, school districts, and trade unions. From at least March 2009 to September 2010, DeMiro falsely promised multiple clients that he would purchase millions of dollars in certificates of deposit (CDs) for investment on their behalf. Among his victims were municipalities, a school district, a bank, and a credit union serving church members, employees and other church related institutions.
Instead of using the clients’ funds to purchase the CDs, DeMiro wrongfully diverted the investments in order to make loans to a local jewelry store and re-pay other prior investors. Yet another Ponzi scheme, replete with con artist and far too many unsuspecting victims. The losses in DeMiro’s scam were initially calculated at approximately $10 million.
A Criminal Complaint was filed against DeMiro on September 15, 2010, and on October 7, 2010, DeMiro was indicted by a federal grand jury in Detroit on charges of bank and wire fraud. He faced a statutory maximum penalty of 30 years in prison and a $1 million fine for bank fraud; and 20 years in prison and a $250,000 fine for the wire fraud.
On April 19, 2011 Dante DeMiro pled guilty to five counts of bank and wire fraud. DeMiro stipulated that the loss caused by his fraud exceeds $7 million, and that he abused a position of trust in his fiduciary capacity as an investment adviser. Sentencing is scheduled for July 12, 2011.
“Michigan Ponzi Scamster DeMiro Pleads Guilty” – Forbes
Published: April 20, 2011
Web accessed: April 21, 2011
For the complete story, click on the following link:
http://blogs.forbes.com/billsinger/2011/04/20/michigan-ponzi-scamster-demiro-pleads-guilty/
Segregation
One of the most important measures your ministry can take to protect cash and YOU is implement segregation of duties, i.e. no single person should have control of the cash process.
Ensure that the function of counting contributions and receipts is segregated from the depositing, general ledger and reconciliation functions.
Accountability
Accountability means that ALL cash is accounted for, properly documented, secured and traceable. When accountability is implemented properly, the ministry is able to answer the 4 W’s at any given time:
- Who has access to cash
- Why they have access to cash
- Where is cash at all times
- What has occurred from the transaction’s beginning to the end
Reconciliation
The monthly bank reconciliation is the single most important control that ties everything together. It allows the ministry to ensure that all cash transactions are accounted for and properly recorded. Once the reconciliation is complete, it should also be reviewed by someone other than the preparer for accuracy, i.e. the business administrator, member of finance committee, your CPA etc.
