Follow these fundraising financial safeguards to ensure that donations are collected securely and properly during charity fundraisers.
Churches and ministries often host fundraisers to support various projects like mission trips, community outreach, facility improvement and staff support. As non-profits, churches rely a great deal on the funds they raise and therefore they have to maintain financial security and trust from the donors which includes creating a secure fundraising atmosphere. Regardless of the size of the church or the number of staff members they use, it is important to maintain a professional approach to donation management and follow safeguards to ensure that church financial fraud is avoided and donors’ contributions are received where expected.
1. Ensure that equipment and food service conforms to safety standards.
Since many events involve food service or use of various equipment, it is a smart move to inspect these features for health and safety violations. If possible, use a certified inspector for conducting these inspections, so that there can be legal support if something goes wrong. If using a vendor, ask for references and qualifications before engaging them for an event. While these activities aren’t directly involved with fundraising finances, it is important to maintain safety in these areas for safekeeping of attendees and protection against lawsuits.
2. Require those responsible for fundraising events to submit financial reports.
According to a survey conducted by our church finance experts, a full third of the respondents have no reporting mechanism for special event fundraisers. While no one likes to assume that a volunteer working at a fundraiser will skim a little of the top, there is nothing wrong with requiring accountability, even as small as having them write and submit a financial report. Safeguards like written reports are a step in the right direction and, when coupled with other measures like multiple persons involved with managing funds and detailed records of tickets and/or products sold, the fundraising event has a better chance of avoiding theft and gathering funds successfully.
3. Secure funds as soon as they are gathered.
Regardless of whether funds are received at one time or continuously, it still should be a priority to secure cash and checks as they accumulate. Keep in mind that it is safer to entrust multiple people with the collection of donations, rather than just one with less accountability, so have at least two people in charge of transporting money from the collection to a safe room where the donations can be kept locked up and safe until counting and banking deposits. With volunteers providing sales reports and volunteers collecting the money, it should be a matter of routine to analyze the reports and totals to make sure they are in agreement.
4. Provide donors with receipts for their tax records.
Donors who wish to claim charitable donations for their federal income tax returns have to provide proof, either in the form of a bank transaction or a receipt from the charitable organization that received the donation. According to the IRS:
“An organization that does not acknowledge a contribution incurs no penalty; but, without a written acknowledgment, the donor cannot claim the tax deduction. Although it is a donor’s responsibility to obtain a written acknowledgment, an organization can assist a donor by providing a timely, written statement containing the following information:
1. Name of organization
2. Amount of cash contribution
3. Description (but not the value) of non-cash contribution
4. Statement that no goods or services were provided by the organization in return for the contribution, if that was the case
5. Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
6. Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described later in this publication), if that was the case”
Even though the responsibility lies with the donor to acquire proof of their donation, a charitable organization that offers the receipts to assist their donors with the task exhibits courtesy and gratitude. By making the proof of donation process simpler, fundraising organizers can encourage even more donations and facilitate the process of raising funds.
Weeds in the Garden provides financial consulting for churches and ministries
If you’re wanting to plan a ministry fundraising event and would like assistance with keeping donations secure and volunteers accountable, contact Weeds in the Garden. Experts at detecting fraud and preventing church theft, Weeds in the Garden has years of experience in church and ministry accounting and financial development consulting.
Part 3 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“The individual who prepares the checks also mails the checks.”
“The person responsible for general ledger and financial reporting also mails the checks.”
Survey results – A little over 50% of the respondents answered the first question positively. However, the number plummeted to 30% for the second.
Separate Accounting Tasks
You may wonder, “What’s the big deal about who mails the check? After all, if the bill has been approved, reviewed and signed, isn’t the process over?”
KEY: Signing the checks is NOT the last step in the bill paying process.
Here are two things we have seen happen.
One person with this much responsibility was also skilled in the art of forgery. Some of the checks signed were craftily altered and redirected to pay down his credit card balance (which had ballooned due to a problem with gambling). Because this person was also in charge of all of the accounting process, there was little chance of being detected.
Another thief presented checks to be paid which were dutifully signed by the administrator. But these are not the checks that were mailed. The original checks were destroyed, and replaced with checks written to the bookkeeper’s creditors and to a brother-in-law. As this person was in charge of the general ledger, the original checks were reflected in the cash disbursement journal. The phony ones were not. Obviously, this technique is risky because at some point the vendor not being paid will squawk.
Due to this risk, fraudsters who use this method are very selective in which vendors they pick. For example, in one case a bookkeeper switched checks with their church’s contributions to its denominational national office. Because these payments were voluntary, it took many months before the theft was discovered.
KEY: How to avoid this? See our next post on the importance of bank reconciliations.
Our next series of posts will be a discussion of budget planning for the church. As I commented on our other blog (Faith Based Accounting: July 27, 2012) “Attitudes about budgets vary greatly among churches. Some churches operate without one, a practice I definitely do not recommend. Many others swing to the other extreme expending great amounts of time (and blood, sweat and tears…) creating a budget plan.”
In the next few weeks, we will try to share some insights that will help churches adequately plan and hopefully land somewhere in the middle of these two extremes. As you read these posts, you might want to consider this as somewhat of a book review because much of the material is based on Money Matters in the Church by Aubrey Malphurs and Steve Stroope. I highly recommend this book; it is one of the clearest and most concise discussions of church finances I have come across.
Our discussion will be grouped into four categories:
Types of Budgets
Part 2 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“From the time of collection to the time of the bank deposit, funds are never, even for just a few minutes, in the custody of a single individual or kept in an unsecured location.”
Survey results – More than 65% of the respondents stated that this is true for their church.
Cash Flow Systems
To avoid fraud, it is of paramount importance that a church has a clear understanding of both of its cash flow systems: inflow (cash receipts) and outflows (cash disbursements).
We recommend that churches, at least once a year, flow chart these two cash flow systems. To help in this process, we suggest they compare their cash flows to the flow of water through the church’s plumbing system. What they should be looking for are any points along the way where one person, by themselves, can turn on a cash flow “faucet”. One of the overlooked phrases in this question is “even for just a few minutes.”
KEY: We are talking minutes, not hours – that’s all it takes for fraud to occur!
To illustrate this point consider what happened at one church. At this particular church one usher serving the balcony, removed all of the cash from the offering plate and stuffed it in his shirt as he made his way down two short flights of stairs. In this case we are talking seconds, not minutes!
Churches have embraced the digital world and are becoming very proficient in the use of computers. A vast array of applications has been made available to the church including sophisticated financial accounting and reporting, childcare security, online purchasing, online tithing, phone trees and coffee bars with free wireless internet. Without a doubt, churches have become technologically savvy.
Unfortunately, there is a vast array of other things that most churches aren’t so savvy about: the numerous new portals computers provide through which fraudsters can gain entry into the church. Computer and online crime is drastically changing the face of fraud prevention. The best way to address this situation is to simply provide a list of questions each church should ask itself:
- Does our church have a formal Information Technology security plan?
- Do any individuals at our church have access to all modules of the church’s software system?
- Does our church partition its computer applications so that employees and volunteers have access only to files necessary to perform their duties?
- Does computer access require passwords that are confidential and unique?
- Are our passwords changed periodically?
- Are passwords complex including alpha, numeric and case sensitive characters?
- Do we have backup procedures that are performed regularly that include off-campus storage?
- Do we have measures in place to protect the church from malware?
- Do we train our employees to avoid accepting email from unknown locations?
- Do we have a download policy?
- Do we maintain separate public and private wireless networks?
(This post is part of an article published originally in the Spring 2011, NACBA Ledger.)
Not understanding intellectual property law can be a VERY EXPENSIVE TRAP! David Middlebrook defines intellectual property as “ownership of nonphysical property rights in creative thought or works that have basically been recorded or reduced to written form.” (Nonprofit Law for Religious Organizations; John Wiley & Sons, © 2008)
There are two types of intellectual property that a church needs to be aware of:
First, every church must be familiar with the intellectual property rights of creations by OTHERS. Examples include sheet music, video clips, song lyrics displayed on the screen during worship, and software licenses. The individuals and companies that created these things DESERVE TO BE PAID for their creations! Not adhering to copyright/trademark laws can result in some extreme financial penalties.
Second, every church must be aware of the rules regarding their OWN creations. This includes creations of church employees (including the senior pastor…) who create work in the course of their employment. Examples include music, videos/movies, books and software.
Not being attorneys we are reluctant to give much advice in this arena because intellectual property is more of a legal issue than tax and accounting.
Our advice is usually very short – “Seek legal counsel to help you determine your church’s compliance with these rather confusing laws.” (David Middlebrook’s Church Law Group would be a good place to get this help.)
A close cousin to ignoring the bank reconciliation is maintaining an excessive number of bank accounts.
Rather than using their church accounting software to take care of measuring and tracking restricted giving, some churches open separate bank accounts for each new special gift that may arise.
This results in a number of problems:
Burdens the accounting staff with extra work and contributes to the poor bank reconciliation management we discussed in the previous post.
Creates a great opportunity for a fraudster to play a very effective “shell game”. With multiple bank accounts and limited controls, an embezzler can shuffle funds among the accounts to create a dense smokescreen, making detection extremely difficult.
Key: The best practice is to gave as few bank accounts as possible coupled with strong internal controls and recordkeeping.
Part 6 of our ongoing Fraud Awareness in the Church series will examine Credit Checks. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent of fraud awareness in the church environment. We asked churches to respond to this statement:
Our church conducts credit checks on financial employees and volunteers.
While almost all churches perform criminal background checks on employees and volunteers serving with children, very, very few extend the background check to financial matters.
ONE TRUTH – Potential employees in financial difficulty will bring their money problems with them to your church. (This not only applies to business managers, bookkeepers and accountants, but also ministers who are given oversight responsibilities over a portion of the church budget.)
Unfortunately, many churches learn this lesson after the fact. Performing a credit check PRIOR to hiring can prevent a boat load of misery!
Credit checks require a little more work than criminal background checks. The individual must give their permission and there must be a financial reason for conducting the credit check.
KEY: Credit checks on employees and volunteers who oversee financial matters can help flag and prevent potential fraud in the church.
One of the more serious traps churches can fall into is poor bank reconciliation practices. Some of the ways we have seen this played out:
Due to understaffing and time pressures, bank accounts are not reconciled for months at a time.
Bank reconciliations are not complete consisting only of checking for cleared checks and surface level comparison of bank statement balance with the general ledger balance.
The bank reconciliation is prepared by the same person responsible for check writing, general ledger, reporting etc
There is no review of the bank reconciliation by supervisory personnel.
All of these things seem to take place because the church staff and volunteers have a poor understanding of the importance of the bank reconciliation. The bank reconciliation is the “Grand Central Station” of an organization’s financial activity. With the exception of a few, usually immaterial transactions, (such as petty cash disbursements) every transaction will flow though the bank accounts of a church. Performing the bank reconciliation on a timely basis helps insure the viability of a church’s financial reports. Additionally, having an independent reconciliation is one of the most effective fraud prevention measures.
KEY: Make sure your bank reconciliation tasks include:
A comparison of dates and deposit amounts with teller team reports
Investigation and documentation of transfers between bank accounts
Accounting for the sequence numbers of checks written.
Examination of cancelled checks for suspicious signatures, endorsements or other alterations.
Comparison of payees on cancelled checks with the approved vendor list.
Review of voided checks.
Part 5 of our ongoing Fraud Awareness in the Church series will address Policies and Procedures Manuals. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent of fraud awareness in the church environment. We asked churches to respond to this statement:
Our church has compiled written financial, accounting, management and personnel policies in a central document such as an accounting and management policy manual.
Given the multitude of church management resources available and the myriad of church conferences that church managers can attend, it surprised me that only 50% of the respondents answered “yes” to this question. The reasons for this low compliance rate puzzles me, but if I had to make a guess as to the culprit, I would say that it is because of the “tyranny of the urgent” environment that many church managers live in. Because of their overloaded schedules many simply adopt the “Wac-a-Mole” management theory in which the administrators simply handle what pops up next. As long as they are getting the job done, they see no need to document procedures.
Unfortunately, by doing this, they are ignoring the fact that not having written policies and procedures is not only a bad way to do business, it also exposes the church to fraud. The reason? Fraudsters HATE BASELINES!
Baselines help the church define “normal”. Without normal or standard operating metrics it is difficult to determine if this year’s numbers are consistent with last year’s. These blurred lines are a happy hunting ground for crooks.
KEY: Implementing a Policies and Procedures Manual will establish baselines and definitely help prevent fraud in your church!