Chapter 2: First, Be Sure You Know What You Are Looking For…

Nov 9, 11 • BlogNo Comments

In Chapter two of the book Weeds in the Garden, by Verne Hargrave, he discusses three types of fraud: fraudulent financial reporting, corruption and misappropriation of assets.  The most common of which is misappropriation of cash, or theft in the church environment.

“Generally, two terms are used to describe frauds involving an organization’s cash receipts: skimming and larceny.  The difference between the two methods is the timing of the fraud.  The process of stealing money before it is recorded in the accounts of the church is called skimming.  A classic example of church skimming is an usher removing cash from the offering plate on his way to the counting room.  On the other hand, if the usher removes money from the bank bag on his way to the bank, after the funds have been counted and recorded in the church’s records, he has committed larceny.  Cash larceny tends to be a little more difficult because it usually requires “record doctoring” in order for the thief to cover his tracks.  Because most churches tend to look closely over the Sunday offerings, thieves’ favorite targets for this type of behavior tend to be other revenue sources, such as food service cash boxes, weekday drop-off and mail receipts, and fund raising cash managed by volunteers.”

Midweek receipts are the most vulnerable to theft in most organizations.  Many times as an auditor I have seen “Timmy’s Camp Money” or “Cash from Bake Sale” sitting on a financial administrator’s desk tempting any passerby.  In keeping with Matthew 26:41, we know that the spirit is willing, but the flesh is weak when faced with temptation.  So let’s be careful to use controls like a lockbox where church members and staff may drop the cash into a locked depository that can later be opened and accounted for by the administrator.  Otherwise your cash might just walk away and you may never even know.

Are there any practices in your Church that might be vulnerable to theft?

Check out the Weeds in the Garden website.

–Daniel Lienemann, CPA is a Senior Auditor specializing in church accounting at PSK LLP.

Chapter 9: Can’t You Control Your Spending?

Oct 26, 11 • BlogNo Comments

As a nation, uncontrolled spending at the personal level has led us into financial crisis in the past several years. Churches are not immune to detrimental attitudes and practices of the nation. Additionally, churches are particularly vulnerable to potential fraudsters. In his book, Weeds in the Garden, Verne Hargrave discusses the church’s finances, its attitude and responsibilities towards them, as well as steps it can take to manage them in an intelligent and responsible manner.

Verne writes,

“A church should develop a rational plan to expend its resources, giving equal weight to accountability and ministry effectiveness. This is not only good stewardship; it is also good fraud protection…

Fraud prevention over cash disbursements follows the same cardinal principle used in managing cash receipts. Money, or access to it, should never be in the possession of one individual, regardless of the brevity of time. The only difference between these two areas of fraud prevention is the direction; outflow as compared with inflow.

Every church should perform a periodic fraud assessment of its cash disbursements with the objective of identifying and strengthening weak spots. Weak spots consist of any place along the church’s cash ‘outflow’ path (disbursements) where one individual can help himself to the church’s money.”

Has your church performed a Fraud Risk Assessment lately, or ever? Can your church’s contributors rest at ease that their sacrificial giving is being spent wisely and is not lost to theft?

–Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.

Chapter 6: Are you producing financial statements or spin documents?

Oct 19, 11 • BlogNo Comments

In Chapter six of the book Weeds in the Garden, by Verne Hargrave, he discusses the use and abuse of financial statements. Specifically he discusses how the financial statements can often be produced to “look” a certain way either to improve revenues or reallocate expenses.

“…The church should follow a budget. Every church needs to know what “normal” is. It can prove very difficult to determine if theft is taking place if a church does not have any idea of what its financial expectations are. The budget should be adopted by the church’s normal governance procedures and loaded into its accounting software. Budget results should be monitored and variations between budget and actual regularly examined. One word of warning: a practice that is frequently used by churches is to allow overspending in line-item accounts as long as total department expenditures remain within budget parameters for that department. This may not be the best practice. A budget is simply a tool and if a line-item is not sufficient, the budget should be amended by the appropriate leaders of the church. This preserves the concept of “normal for each department. Much mayhem can take place within a single departmental budget!”

Does your church have a process to amend budget line items? Is there a regular review by your governing board of budget vs. actual revenues and expenses? Don’t wait until the end of the year to realize large budget overages, be proactive and manage spending with effective use of reliable reports comparing budgeted amounts to actual cash received and spent.

Check out the Weeds in the Garden website.

–Daniel Lienemann, CPA is a Senior Auditor specializing in church accounting at PSK LLP.

Red Flag # 2 – Bringing personal financial problems to work.

According to the Association of Certified Fraud Examiners, the second most common red flag is financial difficulties of individuals involved in financial matters of an organization.  The occurrence rate of 36% consists of reported frauds at all levels of the organizations victimized.  However, if we look solely at frauds committed at the employee level (disregarding frauds committed by managers) the rate soars to almost 50% of all fraud cases.

This makes sense because employees receive lower compensation compared to the management level.  When unexpected financial events occur, they are less likely to have a “rainy-day fund” set aside to get them through.  This can lead to poor judgment in several areas, the first of which is usually excessive use of credit cards.  When these individuals find it difficult to climb out of their debt problem and they might focus on other areas of relief, one of which is their employer’s money.

Once again, I must stress that the presence of these circumstances is proof of nothing, but organizations must keep in mind that personal financial difficulties are a common denominator in a great many fraud occurrences.  But, how can a church leader address this possibility?  Here are three thoughts.

  • In addition to performing the normal background check, a church might consider performing annual credit checks on employees involved in the financial activity of the church.  It is not too much of a stretch to say that if you hire someone with a poor credit history, you have hired their problems as well.  Keep in mind, that credit checks generally require the employee’s permission
  • Provide financial counseling for employees.  This is another way to discover if any employees are struggling with finances.  But it also helps the church relieve some of the pressure an employee may be experiencing by providing a way out of their dilemma.
  • Finally, and most importantly, you must close down the opportunity of fraud.  In most of the church fraud cases I have read, the most common characteristic is terrible segregation of duties.  Often, one person is in charge of all of the church’s financial tasks.  When you combine these two ingredients: financial troubles and total control of a church’s financial activities….

Well, you can guess the rest.

Red Flag #1 – “I can resist everything except temptation.”

I doubt that Oscar Wilde had church fraud in mind when he penned these words, but they do describe the nature of many embezzlers.  Occasionally, the irresistible temptation to treat themselves to luxury items overrides a thief’s need to keep hidden.   Ultimately, this inability to resist temptation brings unwanted attention to the culprits in the form of things like fancy cars and exotic travel. For example, several years ago a treasurer of a church organization was convicted and sentenced to five years in prison for embezzling more than two million dollars.  Infuriated by what the judge termed a “spurious psychiatric defense”, the judge went on to describe the treasurer as a “common thief” who looted church funds to live the life style of someone she was not”.

Employees suddenly and unexpectedly living beyond their means can be significant red flag.  In fact, according to one report, this situation is the most prominent red flag, present in more than 43% of reported cases.

However, we do need to be careful with this red flag.  An employee suddenly living above his means is not proof that fraud has taken place.  Some people do have rich relatives who leave them money. (Just not in my family…)

Red Flags

Typically there are three ingredients that must be present in order for a fraud to take place.  Commonly referred to as the “Fraud Triangle” these three ingredients are:

  • Pressure – Forces playing upon individuals in positions of financial responsibility that would make them begin to contemplate doing something they otherwise would have never considered.  Frequent types of pressures are unexpected medical costs, job termination or business reversals of a spouse, addictions and a need to “keep up with the Joneses”.
  • Rationalization – The self-talk perpetrators engage in to convince themselves that what they are about to do (or are already doing) is ok.  For example, the number one rationalization is “I’m not stealing; I will pay it all back.”
  • Opportunity – The ability to take advantage of a church without getting caught. Sadly, the most common opportunity for fraud in the church environment is the situation where one bookkeeper has total responsibility for and access to the church’s accounting system.

Generally, a church business administrator has significant control over only one of the Triangle’s legs; Opportunity.  Unfortunately, much of the influence of the other two legs, pressure and rationalization, are out of a church’s control; a church has very little influence on outside economic pressures its staff faces.  And, a church has virtually no control over the thought processes of its employees and volunteers.

Key Point – But, there is one thing that can be done – A Church Business Administrator can (and should) become a keen observer of his or her staff and volunteers.

Every two years the Association of Fraud Examiners (ACFE) publishes its Report to the Nations.  In this document, the ACFE summarizes data compiled from fraud incidents reported to it by member Certified Fraud Examiners.  One interesting part of the 2010 report is “Behavioral Red Flags”.  These red flags were compiled by victims of fraud, who on reflection recalled certain behavioral changes on the part of the fraudster.  Unfortunately, if these red flags would have been noticed earlier, the frauds could have been curtailed at a much earlier stage.

In our next series of posts we will share a few of the most common red flags.

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.

All It Takes is One Person

As I was doing my routine search for fraud related news this morning, I stumbled upon this story:

http://www.northjersey.com/news/crime_courts/113330879_Not-guilty_plea_in_swindle_that_snagged_church.html

In my search for fraud related news articles I have come across a wide range of scenarios, but majority had a common denominator; the church impacted by fraud either dissolved or struggled for survival in the aftermath.

Tithes, offerings and contributions are the bloodline of every church. The need to uphold the confidence amongst its members and general public is extremely important, not just because it is important for the continued existence of the ministry but also because it is our duty to be good stewards.

Most members and donors would curtail or completely disassociate themselves with a church if they have any reservations about the financial activities of that church. So performing annual fraud risk assessments at your church is not only vital for members’ confidence but also can be extremely effective in drawing additional members and contributions.

Remember, all it takes is one person with the motivation and opportunity to bring down your church.

Are you willing to take that risk?

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.

Learn more at: http://pop.pskcpa.com/fact/ or give us a call at (817) 664-3000.

A Commitment to the Future

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).

“Keep watch over yourselves and all the flock…”

Jan 25, 11 • BlogNo Comments

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.

Learn more at: http://pop.pskcpa.com/fact/ or give us a call at (817) 664-3000.

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