Trap #2 Operating without a compensation plan (Part 4)

It’s so difficult to say goodbye – firing right

Churches should follow prudent steps in firing employees.  This begins by making sure that the termination must be for a legitimate, nondiscriminatory reason.  Prior disciplinary measures must be consistent with church personnel processes and policies

The first step should be to schedule a meeting that includes the terminated employee, the employee’s supervisor, the church HR director or supervisor’s manager and the church’s legal counsel. (If considered necessary.)

First and foremost, the church should make it a goal to preserve the employee’s dignity.  Keeping the meeting as brief as possible contributes to achievement of this goal. A concise explanation to the employee of the reasons for termination should be given along with a carefully documented history of the issues.  That is why the performance reviews mentioned in our previous post are so important.  Having a documented case history prevents the employee from asserting they were never informed.

KEY: Do not let the employee drag the process into an argument!

If severance pay is offered to the employee, discuss the terms of the severance with the employee.  Church property including passwords, office equipment should be collected from the employee by providing the employee with choices of when he or she may pick up personal belongings.

Also, unused benefits, unpaid expense reimbursements, and written permission in regard to references should be addressed.

KEY: In some cases it may be better to deem the termination a resignation, especially in the absence of animosity.  It is another way for preserving the employee’s dignity

Church Payroll – Fraud in the Church – Survey Results part 8

Part 8 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church reconciles payroll quarterly reports with the payroll journals and general ledger.

Almost 25% of our respondents do not perform this relatively simple task. I can show you plenty of news reports of churches who wish they had!  Occasionally, I need to point out the obvious; thieves do not like to get caught!  To remain successful at this, they have to hide in the tall weeds. This means they are going to target the big numbers in a church’s financial statements.  And the biggest of the big numbers is payroll cost.

Typically, payroll makes up 50% of a church’s operating budget.

For example, if a church has a one million dollar budget, a thief can easily find cover among $500K of tall weeds!

To avoid being the victim, churches should take care to:

  • Know who their employees are
  • Know how much their employees are paid
  • Periodically review activity in the payroll general ledger accounts
  • Compare payroll reports with budget totals.

Trap #2 Operating without a compensation plan (Part 3)

Happy together; managing your employees

The best way to avoid mistakes in hiring and in firing is to employ simple, repeatable processes to help insure that the right things are done at the right time.  One way to do this is to develop a “New Hire Packet” which should be given to each new employee.  Some of the items that should be submitted to each employee are:

KEY: A copy of the official church employee manual

A form W-4 to be completed by the new employee

A form I-9 (Department of Labor requires all I-9s to be filed in a stand-alone file)

In addition to providing new hires with relevant forms, the church should maintain a separate file for each employee.  Personnel files should be kept in a secure location and it is a good idea to store active and inactive personnel files in separate locations.  Medical information must be kept in a separate file from the regular personnel files in order to be in compliance with the Americans with Disabilities Act.  Other confidential information that should be kept separately includes the I-9, grievance and investigation records, and garnishments and loans to employees.

In addition, personnel files should include the original application form submitted by the employee, a signed W-4 and a copy of ministerial credentials for all employees hired to serve as ministers. (Ordination, licensing or commissioning certificate.)  This is not mandatory, but rather a “best practice” insuring that church ministers are treated properly for income tax purposes.  Paycheck deduction authorizations signed by the employee should also be retained and updated. 

KEY:  Finally, a record of performance reviews, evaluations and reprimands must be maintained on a current basis.

KEY: Many churches keep up with all of this paper work by using a personnel file checklist which assists in making sure all t’s are crossed and i’s dotted.

Benevolence Funds – Fraud in the Church – Survey Results part 7

Part 7 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church follows written guidelines in administering benevolence fund activity.

Many churches establish benevolence funds to assist needy persons. This is a normal and expected function of any church. However, if assistance programs are not monitored closely the benevolence fund can become a target of theft. Benevolence funds are favorite targets for several reasons:

  • There is no business cycle, making baseline analysis almost impossible
  • Checks are written to a variety of individuals and vendors not closely related to the church, making it easy to slip one more in the pile
  • To protect the confidentiality of recipients, some churches operate separate bank accounts that only one person has the right to see!

35% of our respondents do not follow written guidelines in administering assistance programs.

It is extremely important that the Church establish clear policies on its benevolence activities. Such policies should include but not be limited to:

  • what funds will be accepted
  • who will administer the funds
  • who will receive the funds, and
  • for what purposes the funds will be spent.

Best practices also dictate that a documented beneficiary application and approval process be followed when awarding assistance.

Trap #2 Operating without a compensation plan (Part 2)

Getting off on the right foot – hiring right

One way to avoid unhappy situations is to begin on the right foot.  And in personnel matters, that means hiring right.  Churches should follow prudent steps in hiring their employees.  For starters, a church must know what it is looking for in a new employee.  That means that job descriptions should be prepared prior to the interviewing process. 

Once that is done, a church can then begin recruiting and evaluating potential employees.  Here are a few tips to guide churches in the recruiting process:

  • Maintain a record, in writing, of all job openings.
  • Keep a file of the various advertisements it has placed to recruit applicants.
  •  Utilize a standardized applicant screening and interviewing process, making sure that managers are properly trained in the conducting of effective and legal interviews.
  • Utilize a standard application form which informs applicants of the terms and conditions of employment. (Particularly the right to consider their religious affiliation.)
    • The application should avoid unlawful pre-employment inquiries. (Age, race, sex,. etc)

KEY: The application should be reviewed by the church’s legal counsel prior to being used in the hiring process.

Fundraisers – Fraud in the Church – Survey Results part 6

Part 6 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church requires volunteers responsible for special events to submit written financial reports.

The vast majority of churches have implemented adequate control procedures over the Sunday offerings. However, funds that arrive in the church office from Monday through Saturday are a completely different story. These types of revenues typically consist of offerings dropped off by members, fees for various events and food service revenues and special event revenues under the direct supervision of volunteers, such as fundraisers, banquets, and short-term mission trips.

According to our survey, a full third of the respondents have no reporting mechanism for these types of special events. Theft of special events funds by trusted volunteers frequently pop up in the news media. For example, in the city where I live, a prominent public school coach was relieved of his duties when it was learned that he was in the regular habit of skimming from the receipts his team’s annual fund raiser.

To avoid the headlines, at a minimum, churches should require volunteers to account for tickets and/or products sold and fees collected at fundraisers and special events. As a matter of routine the sales report should be reconciled with the total cash generated and deposited into the church bank account.

Trap #2 Operating without a compensation plan (Part 1)

The second trap, or thing to avoid, deals with payroll.  Churches face risk in a variety of areas.  Facilities, congregational unity, financial, security, and our next topic, personnel are just a few areas of danger.

In business terms, churches are in the “service industry” and as a result, typically, 50% of church budgets are dedicated to salaries and benefits. Personnel risk is significant. Operating in the personnel arena without a formal plan makes it even riskier.

Unfortunately, some churches do exactly that.  Here is what has happened to some of those who chose not to manage personnel risk:

  • Churches have been sued (and lost) after automobile accidents in which it was discovered the church assigned driver had a prior DWI.
  • Churches have been sued after discovery of prior child abuse convictions of some of their employees.
  • Churches have been victimized by embezzlers with prior convictions.
  • Churches have been sued for unlawful terminations.
  • Churches have been sued for sexual harassment.

In the next few posts, we will discuss things that should be done in order to avoid situations like these unfortunate churches.  It’s important to point out that they were unfortunate primarily because they were careless.

Purchase Orders and Check Requests – Fraud in the Church – Survey Results part 5

Part 5 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church uses pre-numbered purchase orders or check requests.

Theft of cash receipts, particularly offerings, garners the most attention by churches in their fraud prevention practices.  However, the largest dollar-loss incidents tend to occur in the bill paying arena.  In most of the check writing fraud cases I read about I see the same four ingredients which allowed the theft to take place:

  • Poor segregation of duties
  • Failure to pay attention to the bank reconciliation process
  • Poor security over the church’s check stock
  • Absence of a formal bill approval and payment system

The starting point of a formal bill payment system is the utilization of preprinted (or computer generated) sequential purchase orders or check requests.  The absence of such a system can be the beginning of sorrows for a church.

Approximately 54% of the survey respondents reported not using proper documentation to begin the bill approval process.

Trap #1 Operating without a plan – Long-term plans (continued)

Today we continue our discussion of the importance of long-range planning by looking at two other areas where churches need to be taking soundings, to see if storm clouds are on the horizon.

Ignoring long-range giving opportunities

At the present time, our society is going through the greatest asset transfer in world history.  Many of the baby-boomers, who have lived through the most prosperous eras of our nation’s history, are reaching retirement age.  With ever increasing amounts of disposable income many are also looking for worthy charities to share their abundance with.

Many pastors are surprised when they read in the newspaper or online that one of their members has given a substantial endowment gift to the local university or hospital.  Some pastors screw up the courage to ask why the church was not the beneficiary only to hear the following comment.  “You never asked.”

Whether churches like it or not, they live in a competitive arena.  Various organizations within the nonprofit sector are vying for a limited amount of donor dollars.  Churches also need to realize that secular charities are asking their members for significant gifts.  Maybe the churches should too…

When it comes to fund-raising, few churches look past current budget needs or an occasional building campaign.  Very few venture into the planned giving arena.  Perhaps it is time to begin.

Failure to address demographic change in the church’s mission field

In the last few decades, immigration has drastically changed the demographic makeup of our nation.  In the course this major shift, neighborhoods have taken on a new look and culture.  Unfortunately, many churches failed to adapt to their surroundings, and as a result, have seen a dramatic decline in membership.  In fact, many have ceased to exist.

Because most of these churches are in older parts of most cities and towns many church leaders in the growing areas feel somewhat immune to this situation.  I think this is a false sense of security.  I am getting old enough now to have seen quite a bit in my career providing services to churches.  One thing I have noticed is that churches do indeed have a cycle they follow.  Eventually, the new becomes old and almost all churches must re-evaluate their situations.  It is essential, to be an effective ministry present, each church must evaluate its calling.  One way to do that is to have a firm understanding of its surrounding neighborhoods.  By paying timely attention to these matters, churches can adapt their efforts and provide ministry to their new neighbors. 

Reviewing Authorized Check Signers – Fraud in the Church – Survey Results part 4

Part 4 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

We present a list of authorized check signers to the Leadership Team. (Elders, Finance Committee, etc.)

This is one of the routine questions we ask financial staff when we conduct an audit of a church. While monitoring check signatures has some merit, it is in my opinion, rather overrated due to the fact that commercial banks no longer review signatures to the same extent they did in the past. Also, if you are unfortunate enough to hire a thief with courage and great handwriting skills, no amount of signature verification will be sufficient. A person with sufficient bravery and forgery skills can wreak havoc on even the most secure systems.

But, a byproduct of this process can be extremely beneficial.  An annual review of authorized check signers, forces the church to also assess how many and the nature of the bank accounts it has on hand. If no review is ever performed, it can be easy for a bank account (or two or three…) to unofficially “go inactive”.  These “dormant” accounts can sit under the radar for years until a dishonest employee discovers them.

One of the hurdles a thief has to jump is once funds have been diverted, how to get stolen dollars out of the church.  Dormant accounts are very handy in meeting this challenge.  To illustrate, small amounts can be siphoned out of a church by the payment of phony invoices. The thief allocates these illicit transactions throughout various budget line item accounts being careful to keep the total for the year within budget limits.  Once the funds are safely in the dormant account the thief simply transfers the funds to a personal account…

Our survey results indicated that 41% of the respondents reported they did not conduct an annual evaluation of its bank accounts and signatures.  That is a wide margin of opportunity for would-be thieves.

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