Credit Checks – Fraud Awareness in the Church – part 6

Part 6 of our ongoing Fraud Awareness in the Church series will examine Credit ChecksPSK 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.

Bank Account Theft – Fraud in the Church – Survey Results part 10

Part 10 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 has established a “Positive Pay” arrangement with our bank.

Increasingly, due to technological change and advancement, the threat of fraud is no longer limited to dishonest employees. Hackers and other “online bandits” have become quite proficient in draining the bank accounts of the unsuspecting. One defense against this is to establish a Positive Pay arrangement with your bank.

Only 5% of our respondents have this type of bank account protection in place, which is surprising because Positive Pay is a simple three-step process.

  1. During the check writing process, a list is compiled of bills to be paid.
  2. The list is sent to the bank.
  3. The only checks or drafts to be cleared by the bank are those on the list.

I am very curious why so few take advantage of this. Any ideas?

Vendors and Payments – Fraud in the Church – Survey Results part 9

Part 9 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 has established an “approved vendor list”. All payments for goods or services are made only to vendors on the list.

A surprisingly high percentage of our respondents – 82% had not established an “approved vendor list”. A common misconception in the church environment is that, “If we are going to be hit, it will be directed towards our tithes and offerings.” While this does happen frequently, some of the largest dollar losses occur in the disbursement processes, not the receipts. Also, these types of frauds, because of their difficulty of detection, seem to go on for longer periods of time than thefts of cash receipts. From my observations, it seems that many more churches are hit after their revenues are safely in the church’s bank accounts, not on their way in.

The first line of defense against vendor disbursement fraud is the development of well-defined AND well-written bill approval and payment policies and processes.

In addition to purchase orders and check requests, such a system should include a formal vendor selection and retention process. After successfully screening potential donors, the church should develop a preferred vendor list. As part of the check signing process, payees should be compared to the approved vendor list.

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.

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.

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.

Church Fraud Hotline – Fraud in the Church – Survey Results part 3

Part 3 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 has established a formal program for reporting fraudulent activities.

In its 2010 Report to the Nations, the Association of Certified Fraud Examiners revealed that 40% of fraud cases were initially detected by anonymous tips. Half of the tips came from employees.  Approximately two-thirds of these cases were communicated through the entity’s fraud hotline.  This data is not inconsistent with prior years’ findings.  In fact, during one year a whopping 60% of detected fraud was discovered by the combination of tips and/or by accident!  In our survey, we learned that 59% of the churches responded reported having no mechanism for employees, members, and vendors to report suspected improper behavior.

The use of anonymous hotlines, usually found on an entity’s website, has been quite successful in the corporate and government environments.  However, this is a tough sell in the church environment as it seems distasteful to most people involved in church.  And that includes me…

I have been (and remain) reluctant to recommend to my church clients taking such a step.

However, one solution I have seen, that may be a good middle-ground is to outsource this function.  There are third parties who provide this service by making available a toll-free phone line and a web address.  Because confidentiality is crucial, all reports go directly to the third party and bypass any nosy people along the way.  As part of the church’s whistleblowers policy (which I hope your church has) a description of the third party providing these services and the processes to be followed should be included in the church personnel manual.

What do you think about this idea?

Cash – 3 Musts for Your Ministry

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.

Posting a Guard over Fixed Assets

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.

A Well Defined Purchase Approval and Payment System

There is a great difference in attitude in the church environment between receipts and disbursements.  While churches exercise extreme vigilance over the “inflow” of funds into the church, many have a rather cavalier attitude towards the “outflow”.

Churches also tend to rely on a few “fraud prevention” methods which in my opinion provide little more protection than a security blanket.  They may give a warm and fuzzy feeling, but are no help in a real crisis.  The two I hear most often are the requirement of dual signatures for checks over a predetermined amount and the requirement that a check request form be filled out before anyone gets paid.  It is not uncommon for these to be the only two “fraud prevention” controls exercised over cash disbursements.  Churches that rely on methods this simple are unaware of two basic facts.

  • First, dual signatures and homemade check requests are absolutely no match for an ethically challenged employee with the courage to forge. 
  • Second, and this may be the most surprising, many of the larger and more spectacular embezzlements involve tampering with the church’s cash outflow, not the inflow.

 

Key: While no system is foolproof (especially if collusion is involved) the best fraud prevention practice in regard to disbursements, is to segregate the bill paying tasks between as many people as possible.  Some of the more important tasks to distribute are:

  • Payment approval
  • Receiving of goods
  • Check preparation
  • Check signing
  • Bill mailing
  • General ledger maintenance

Unfortunately, very few churches have enough employees to split all of these tasks up.  So what can be done?

Just as with cash receipts, a good place to start is by holding another brain-storming session in which the church’s procurement processes are analyzed.  Flow-charting is a very useful tool in this exercise.  Then, to the best of the church’s capabilities, the tasks should be distributed among several employees and volunteers.  But even after this process, most churches will have more tasks than people to give them to. 

But, there are other steps that can be taken.  Although they take place after-the-fact, these practices still provide strong measures of fraud prevention. 

  • First, someone outside the business office could be assigned the task of reconciling the bank account monthly.  This could be another employee, the business administrator, or a competent volunteer.  The reconciliation should not solely be a “balancing” of the checkbook but should also include a close inspection of the cancelled checks for endorsements and signatures and an analysis of outstanding items.  Online banking and remote access has made this practice even more efficient and practical, as volunteers do not have to come to the church office to do the work. 
  • Another step is to perform an analysis of the church’s check register by exporting it to an electronic spreadsheet and sorting by vendor.  It is surprising how quickly check writing “anomalies” can be detected using this procedure.  This practice should also be performed periodically.

Although not foolproof or guaranteed to catch everything, these two practices serve a bigger purpose.  Key: They are loud and clear advertising to any and all, that someone is looking.  This will force a potential thief to at least stop and ask himself; “Do I feel lucky today?”

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