To successfully prevent becoming the victim of fraud, a church must assess its current condition, develop a fraud protection plan and implement the plan. But, it can’t stop there. Key: The church must live by the plan from that point forward. It must make a commitment to the future. The plan must be on-going. A few key elements in an on-going fraud prevention program:
- Establishment of a formal, written program for managing fraud risk.
- Assigning ownership of the task to an anti-fraud taskforce made up of key employees and officers.
- Educating staff and members of the risks of fraud.
- Periodically (annually is preferred) assessing the church’s systems in regard to fraud susceptibility.
- Implementing a periodic review of transactions (often referred to as internal audit).
“”The secret of staying young is to live honestly, eat slowly and lie about your age.”–Lucille Ball
One way to answer the question “Who gives the money?” is to analyze giving according to age groups. Two methods of analysis can be used: Computing the total dollars given by each age-group and/or computing a per capita giving average within each age group. These calculations allow the church to identify giving patterns within the church and determine if any of its member groups are lagging behind. With this information the church would then be able to engage in strategic, focused stewardship education.
For instance, if the younger groups in the church are lagging in giving, (which is often the case) the church could provide personal financial management programs aimed at young families (Dave Ramsey for instance) rather than conducting a church-wide “Stewardship Emphasis Sunday” (which is the usual approach.)
On the other hand, if the largest giving seems to be coming from the Boomer generation a different strategy may be called for. As this group approaches retirement it may be time to implement a planned giving campaign.
Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.
Last week, as I was trying to dig through the computer for my username and password for eBay I realized that I spend more time and energy trying to protect myself today than ever before… locks, alarms, usernames, passwords, pin numbers, codes, security questions, security answers…the list goes on and on.
It may come as a surprise that in this increasingly security conscious society we all religiously lock our doors and set the car alarms but are unwittingly allowing a more understated criminal into our churches every day…the fraudster.
We invest a lot of time, energy and resources protecting ourselves, our families and possessions but what about the house of God?
“Keep watch over yourselves and all the flock of which the Holy Spirit has made you overseers. Be shepherds of the church of God, which he bought with his own blood. I know that after I leave wolves will come in among you and will not spare the flock…So be on your guard…” – Acts 20:28-31 – NIV.
To help you be proactive in protecting your church we have created FACT, which will identify any cracks in your system and help you prevent fraud.
I don’t mean this literally of course. Few churches have the resources to have full time security guards. But, churches need to do more than they currently do. Because churches “obsess” over watching over their bank accounts, they have very little time left to watch over their “stuff”. That’s why I can safely say that every church with non-cash assets will testify that if you don’t watch your fixed assets, they may just “walk off”.
I am also fairly certain that this inattention is very costly. Most churches would be shocked if they totaled up their annual replacement costs for computers, televisions, recorders and sound equipment. It would also be interesting to know how much of the purchases were to replace items stolen or “misplaced”. Churches would save money in the long-run if they practiced as much stewardship over “stuff” as they do over cash.
The starting point in gaining control over fixed assets is to maintain better records of fixed assets; what is owned, when it was purchased, how much it cost, and where it is supposed to be located. The list should be referred to often, re-evaluated each year and adjusted for disposals and additions.
Periodically a physical inventory should be taken, if for no other reason, to establish insurance values in the case of fire or natural disaster. This does not have to be a complex process and simpler really is better. A video inventory would be more than sufficient.
Finally, some assets need special consideration. These are assets that the IRS is most concerned with and are also most appealing to thieves; assets that can easily be used for personal purposes. Cars, trucks, computers, and video and recording equipment are the most popular types. Churches would be wise to establish a few policies to monitor the use of these assets.
Getting Value out of Your Church’s Financial Data
One of my wife’s favorite television shows is “The Antique Road Show”. Each week, people bring all kinds of antiques and assorted junk to an exhibit hall where experts tell them what they have and more importantly what it is worth. I have to admit that the show has a certain appeal to me as well. I particularly enjoy the scenes where people bring in some object they thought was at best sentimental junk only to find out they possessed an item with immense value.
For instance, one man had an old sampler in what he thought was a very nice frame. He had decided to throw the old sampler away because he needed the frame for another picture. On a whim, he took “the frame” to the Road Show only to learn that he had an early 19th century sampler worth more than $50,000!
When it comes to financial reporting and analysis many churches resemble this lucky man. They sit on a wealth of financial information never realizing its tremendous value because most churches focus all their energy answering three questions: “How much money did we bring in?” “How much did we spend?” and “How much is left?”
While the answers to these questions are indeed important, they are concerned with where the church has been. But, by digging deeper into the financial and statistical information it already possesses, a church can not only know where it has been, but also spot trends and determine where it is going.
One way of digging deeper is to combine financial data with other information. Most churches, particularly the larger ones, have sophisticated church management software that captures significant non-financial information such as names, addresses, ages, zip codes, and contribution history to name a few. Combining accounting information with this information greatly enhances a church’s planning abilities.
To illustrate let’s focus on the revenues of a church. The process is begun by adding one question to the ones mentioned above. In addition to asking how much money the church has brought in, we also need to ask, “Who gave the money?”
In the next series of posts I will share several ways churches can dig deeper in order to answer this question.
Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.
The Tax Relief, Unemployement Insurance Reauthorization & Job Creation Act that was signed into Law in December 2010 has made changes to the way you calculate your social security deductions on your employee paychecks for 2011.
Social Security tax rates will be reduced by two percentage points. The employee-portion of Social Security taxes will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Freelancers, farmers and other self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.
You have until January 31, 2011 to make sure you are calculating your employee deductions correctly and until March 31, 2011 to correct any payroll in January that might have been calculated using the old 6.2% deduction rate.
Please give us a call if you have any questions.
Millions of small employers received postcards from the IRS last Spring that alerted them to the new small business health care tax credit and encouraged them to check their eligibility. Perhaps your church did not receive this notice because it does not file a tax return. Even if you didn’t receive a postcard, your church still may be eligible.
• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Church size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.
Amount of Credit
• Maximum Amount. The credit is worth up to 25 percent of a church’s premium costs in 2010. On Jan. 1, 2014, this rate increases to 35 percent.
• Phase-out. The credit phases out gradually for churches with average wages between $25,000 and $50,000 and for churches with the equivalent of between 10 and 25 full-time workers.
The church will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the health care tax credit. It will then include the amount of the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T (draft available for viewing) will be revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– to claim the health care tax credit.
This could be money in your church’s pocket! Let PSK assist you in determining if your church qualifies for the health care tax credit. www.pskcpa.com.
Except in the rarest of cases, personnel costs are the single largest expenditure of a church. Because churches are in the “service industry”, it should come as no surprise that forty-five to fifty percent of the typical church budget will be dedicated to employee related costs.
This highlights a basic principle in the behavior of an embezzler. For obvious reasons, people committing fraud prefer to remain anonymous. In order to enjoy the fruits of their labor they must remain hidden. It is much easier to hide fraud among the bigger numbers – like payroll.
Key: As a result, personnel costs are a favorite target of fraudsters. Usually, fraud in this area is small-time with one employee falsifying their own time card or submitting phony expense reports. However, some payroll frauds can be quite extensive and creative. The more spectacular (and costly) may involve:
- “Phantom” employees
- Fraudulent insurance claims
- Bogus tax refunds.
These scams can easily run into the tens of thousands of dollars.
Churches should not be naïve about payroll fraud. Because churches are as vulnerable to personnel fraud as businesses, they should do two things.
- First, repeating the theme of a previous section, churches must follow the IRS compliance guidelines. This means designating an independent compensation committee to set compensation amounts, based on market comparison information, and documenting all decisions made. At a minimum, this process should be followed for executive level staff but is also a good practice to follow for the entire church staff.
- Second, churches should also follow a “best practices” approach in human resources administration. In addition to contributing to a healthy workforce these best practices also contribute to eliminating the possibility of fraud. A few of these practices are:
- Establishment of formal job descriptions
- Performing background checks
- Performing regular performance evaluations and obtaining written termination letters from departing employees.
My previous blog gave the wrong website address for ECFA (the Evalgelical Council for Financial Accountability) – the correct address is www.ecfa.org. Sorry about that – unless you're interested in the Ethan Cohon Fine Arts Center in NYC!