Our Fraud Awareness in the Church series continues with a 5-part series on Cash Disbursements.
When churches finally get around to considering their exposure to fraud, they almost universally focus on the cash receipts or the inflow part of their cash processes. Without doubt, many churches have been hit by fraudsters skimming from the offering plates. But in most cases, the losses are relatively small for two reasons:
- Most churches have strong count team processes, although more of them should add some rotation to their teller mix.
- The vast majority of offerings come in the form of checks or credit cards. Very little is cash.
KEY: The fact is, the biggest scams usually occur on the “outflow stream” not the inflow…
In the next series of posts we will see how well protected our church survey participants are on this side of the ledger.
The purpose of Step Two is to allow church ministers and lay leaders to know “how much they will have to work with.” This is extremely important on two levels:
If ministers are given too low a figure, they may become discouraged even before the fiscal year begins. They may begin to think and mull questions like these in their minds:
“Do they think I am a miracle worker?
“This is an impossible task.”
“What’s the point?”
“I think I may be at the wrong church”.
On the other hand, if the ministers are given an unrealistically high amount to work with they will most assuredly become discouraged during the fiscal year. This is a frequent occurrence with the “dream big” budget method. Often, the ministers do exactly what they were asked, dream big. And usually, the dreams are bigger than the resources. The inevitable result will be failure which may breed discouragement. Dissension may not be far behind.
The best way to avoid this is to start with what you’ve got! Try to project what the church’s revenues will be for the upcoming year. Do not simply increase last year’s budget as things might have changed significantly since then. Try to use “real” giving numbers.
Just like the investment advisor’s standard warning, “Past results do not guarantee future results”, what happened in previous years may not happen in the next year at a church. But, past giving activity is a good place to start. First, take a look at the church’s receipts over the last three years or so. Also, take a good look at attendance levels to see if any noticeable trends are present there as well. Combine these two data points to make as good a prediction as possible of what the church expects to receive in offerings in the next year.
Next, the church should turn its attention to the expense side of the ledger. The first step in this process is to calculate the cost of simply “keeping the doors open”. In most churches this will consist of personnel costs, facilities costs, and denominational commitments. Deducting these costs from the projected revenues results in a more realistic estimate of the dollars the church has available for ministry. Ministers then should have a realistic idea of how much money they have to work with to carry out their particular part of the church’s mission.
Part 7 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“Our church requires volunteers to collect, administer and account for special event receipts using a written report developed to properly account for such events.”
Survey Results – Once again, a little over one-half of our respondents are in compliance with this fraud prevention measure.
KEY: Many churches farm out the reporting of special event accounting and require little or no accountability from their volunteers.
A significant example of this took place in our region a few years ago. It took place within our local school district, but the same thing can and has happened at churches. A sports booster club held two annual fundraisers. Some agitated parents (whose children evidently didn’t make the team…) discovered or were tipped off to the fact that checks received during the event were deposited in the club bank account. However, cash received was deposited in the coach’s personal account. The parents didn’t report it to the school district first – they turned him into the newspapers!
The purpose of Step One is to make sure you are staying on “mission”. This is accomplished by reviewing the church’s mission, vision and strategy.
Each church needs to know three things:
– Who it is. (Values)
– Where it is going. (Mission)
– How it is going to get there. (Strategy)
Without knowing these things and applying them to the budgeting process, the church budget will be nothing more that predicting income and CONTROLLING how it is spent. This normally plays out in simply making sure the church stays within its means. Staying within budget parameters is not a bad thing. But, even though the church does not overspend, if it is not DIRECTING the church’s resources towards activities consistent with values, mission and strategy, the budget may end up being a failed exercise.
KEY: THIS STEP MUST COME FIRST!
Part 6 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“We present a list of authorized check signers to the leadership team/elders, etc. for review at least annually.”
Survey results – Approximately 55% of respondents reported reviewing their bank accounts and related signature information at least annually.
Dormant Bank Accounts
I would imagine if we had sent a question asking if they knew why this annual review was important the result would probably be close to zero! This question was lifted right out of our firm’s audit procedures. We ask this question each year and are often asked why this is important.
Here are two good reasons:
Poor management of check signing authority can result in a once-authorized check signer to continue to be one, even though they may have not been a church member/employee for years.
More importantly, poor management of signatures indicates poor management of bank accounts. Occasionally churches will even forget about a few bank accounts that are infrequently used. Unfortunately, fraudsters do not forget once they have found an untended, forgotten about account.
KEY: DORMANT BANK ACCOUNTS can be a useful tool to a thief allowing him to store stolen funds and later transferring them to personal accounts with little chance of detection.
There is no one way to do a church budget. There are a variety of approaches and for the most part, no one way is better than the other. Remember mission and vision? These two factors will also impact how a church goes about its financial planning. I do have to point out however, that even though I say there is no single way to do it right, there are definitely ways to do it WRONG. I have included one of these “must to avoid” approaches in this post.
Here are some of the more popular types of budgets:
- Program Budget – Organizes proposed expenditures in terms of the cost of each program to be carried out
- Performance Budget – Emphasizes measurable performance so that input costs can be compared with output benefits
- Line Item Budget – Budget amounts carry over from the previous year and are then adjusted to current year expectations.
- Zero Based Budget – Prior year amounts are “zeroed out” and we start all over again…
- Ministry Budget – Dollar allocations are based on ministry goals for the year.
- The “Dream Big” Budget…..
As I mentioned above, most of these approaches work effectively. However, in my opinion, I need to express my skepticism about two, one should be approached with caution, the other should be avoided.
- The line item budget has one weakness. Just rolling the prior year forward can be dangerous if the church does not have some type of review of the effectiveness of the ministry each year. If no review is present, churches may continue to fund projects that have not supported the important missions and visions of their congregations.
- The “Dream Big” budget should be avoided. Churches that use this system instruct their ministers to come up with a budget for what they want to do the next year “if money were not an object…” Invariably this approach leads to unrealistic budgets and worse, unmet expectations, resulting in discouragement of both the staff and congregation.
Part 5 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“Our church has a formal policy describing the characteristics required for participation on the count team, including limiting related individuals and restricting the same individual from participating in more than one component of the process.”
“Church volunteers are required to “rotate off” their assignments periodically.”
Survey results – 70% of our respondents reported using some type of screening process for determining teller team members. Unfortunately, only 25% reported that they required all team members to periodically rotate off the count team on a systematic basis. My guess of why this number is so low is that, from my observations, many people serving on count teams consider the service they provide a ministry. It is very difficult for many churches to limit anyone’s ministry.
If a church does screen its volunteers (as 70% appear to do) why is teller team rotation important to fraud prevention? This question can be answered with one word – COLLUSION. Even the strongest internal control systems can be penetrated when two or more people collude (conspire) to commit economic fraud.
The longer people serve together in any role, the more comfortable with each other they become. Over time, they may become tempted. It is much easier to broach the subject of committing fraud with a close acquaintance, than a stranger.
KEY: Being a relative or long-time friend with a fellow volunteer makes collusion a little bit easier.
I ended the last post by asking, “Are these definitions sufficient?” Obviously the answer is no because that would be the end of this blog series! Keep in mind that the three definitions posted were all written by accountants… As a result, the main flaw with these definitions is that they appear to be about only CONTROLS & CONSTRAINT. There is much more to a church budget than these two aspects, contrary to what many finance committee members might think…
These definitions are missing three key words. See if you can spot them in these additional definitions:
- A strategic budget guides the church in allotting and spending its money in congruence with its deep, defining core values to accomplish a specific, biblical mission and a clear, compelling vision. It focuses on where God is taking the Church.” (Malphurs & Stroope; Money Matters in Church)
- “A church budget is simply the vision of the church for the next twelve months expressed in dollars, rather than words.” (Me)
I hope you spotted the same ones I did: mission and vision. A budget concerned only with controlling things and not including the vision and mission of the church, is not adequate.
Part 4 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“Our church does not allow an individual who serves on the count team, is involved in check preparation, or is involved in general ledger and financial statement presentation to participate in the bank reconciliation process.”
“Someone other than the preparer reviews the completed bank reconciliations.”
Survey results – Around 65% of our respondents reported implementation of these controls. And that is good because…
KEY: The bank reconciliation is the Grand Central Station of your church’s financial process.
All of a church’s financial activity should flow through the bank reconciliation. If a person has complete control over the bank accounts and accounting processes, AND is given the task of bank account reconciliation, the church has created a HUGE faucet. No, it’s probably closer to a fire hydrant!
KEY: The most effective step that can be taken to alleviate poor segregation of duties is to have someone outside the day to day accounting processes reconcile the bank account.
DOUBLE KEY: This should be much more than just balancing the accounts. This review should include a close inspection of cancelled checks, deposit slips, etc., and looking closely at payees, endorsements and check signers for abnormalities.
Before launching into a study of anything, I like to make sure I have at least a basic understanding of what the topic is all about. So, before launching into church budget development I looked up a few definitions of what a budget is:
- An accounting device used to plan and control resources of operational departments and divisions. (Warren, Survey of Accounting)
- A plan of financial operation consisting of an estimate of proposed expenditures for a given period and the proposed means of financing them. (Beams, Brozovsky & Shoulders, Advanced Accounting)
- A budget is one of the most effective internal controls… (ECFA, Accounting & Financial Reporting for Christian Ministries)
Re-reading these definitions I notice several key phrases:
– An accounting device
– Control resources
– A plan of financial operation
– An estimate of proposed expenditures
– Effective internal control
Are these definitions sufficient?