Church Fraud Protection: The Top Four Best Fraud Prevention Programs

Protect Against Church Fraud with these Fraud Prevention Services for Ministries

If your church or ministry is finding success and growing, the chances are they will be the target of those who wish to bring them down with fraudulent or deceptive means. Today’s world is seeing many churches, ministries, and non-profit organizations shutting down as a result of not being forewarned about the dangers of financial fraud in the church. Many church leaders and members have fallen prey to financial agreements and contracts that in the end turned out to be “too good to be true”. You may wonder if there are any programs that offer fraud protection to your church. The good news is there is, so let’s take a look at a few of the bestfraud prevention programs out there.
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Church Fraud Prevention Service at Weeds in the Garden – Why We Care

Weeding out church fraud, and embezzlement.

Why do we care about church fraud protection at Weeds In The Garden?

To be honest, well, we love honesty. Church Fraud Prevention is one way to combat a hurtful, damaging form of dishonesty. Why, though, do we love honesty?

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Fraud Prevention Programs

Our Fraud Awareness in the Church series continues with a two-part series on Fraud Prevention ProgramsPSK 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 these statements:

“Our church has established a formal program for managing fraud risk.”

“Our church has developed an anti-fraud team consisting of members from the leadership team, ministerial staff, congregation and professionals such as CPAs, CFEs, or attorneys.            “

“Our fraud risk program includes a routine assessment (at least annually) of the vulnerability of the church to fraudulent activity.”

“Our church has created “ownership” of fraud risk management by assigning the responsibility of managing fraud risks to a member of senior ministerial staff or the leadership team.”

Survey Results: Approximately 40% of respondents stated that they had a formal fraud prevention program in place.  Although I wished the number would be higher, it settled in about where I expected.  What I didn’t expect were the low compliance rates for the next three questions.

These responses indicated a very low compliance rate in three elements that SHOULD be included in a fraud prevention program.  The low numbers also indicated that the formal fraud prevention programs in place are probably not very thorough and as a result, not a very strong defense against fraud occurring in the church.

Only 10% reported having an anti-fraud team in place.  This begs the question, “Is the Administrator having to do this all alone?”

Only 25% reported conducting an annual assessment of their church’s fraud preparedness.  This begs the question, “How do you know your prevention measures are effective, if you really don’t know what they are to begin with?”

Finally, only 25% of the churches reported had actually assigned responsibility of fraud management to an accountable staff member.  This begs the question, “Who’s in charge here?”

KEY: Fraud prevention does not happen by accident!

Payroll Fraud, Phantom Employees

Our Fraud Awareness in the Church series continues as we look at Payroll Fraud and Phantom EmployeesWe asked churches to respond to these statements:

“Someone not involved in the payroll preparation process distributes paychecks or direct deposit stubs.”

“We review direct deposit account information for duplicate accounts.”

Survey Results – Very few churches do any kind of employee verification once the employee has been hired.  According to our survey only 25% of the churches engage in any form of paycheck verification (check stubs in the case of direct deposit).  A little higher percentage, particularly among NACBA members, perform periodic reviews of direct deposit data (Social Security numbers, addresses, duplicate accounts, names of relatives, etc.)

KEY: To avoid phantom employees and payroll fraud, a church must KNOW who their employees are.

The term “phantom employee” refers to situations like this:

An employee is terminated but a supervisor continues to submit hours so that the “employee” continues to receive a check for months, sometimes years, after the employee left.  The supervisor either colludes with the phantom in order to have the check endorsed and cashed or resorts to forgery.

A payroll clerk creates fictitious employees.  These often are friends and relatives and once again, the fraudster will collude or forge.

I suspect the compliance is low regarding these questions because most “church” employees are easy to identify due to the relatively small staff size of most churches (25 to 50) and turnover is relatively low.  HOWEVER, this is not the case with satellite operations such as a daycare program.  Many, if not most, daycare programs are staffed by low paid, low hour, often temporary employees.  Almost by definition, the turnover rate of a daycare program will be volatile compared to the parent organization, the church.  With so many people coming and going, it is almost impossible to know each and every employee – an ideal place to breed “phantom employees.”

Cash Disbursements, part 3

Part 3 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches 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.”

Survey Results – Only 20% of the churches surveyed reported using an approved vendor list.

The low compliance rate of this question was a big surprise to me.  The surprise was that so few churches have a formal process for determining who they choose to do business with.

In a previous post we discussed collusion. One of the methods of theft, resulting in some of the largest dollar losses, is vendor fraud. Vendor fraud often occurs when a purchasing agent within an organization COLLUDES with a corrupt vendor outside of the organization.

What makes this type of fraud especially effective (from the fraudster’s point of view) is that it is extremely difficult to detect, by both the church and its auditors.

KEY: Fraud prevention includes KNOWING who you are doing business with.

Having a vendor application, approval and acceptance process helps the church apply this key.

Cash Disbursements

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.

Segregation of Duties, part 7

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!

Segregation of Duties, part 6

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.

Segregation of Duties, part 5

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.

Collusion

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.

Segregation of Duties, part 4

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.

Bank Reconciliation

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.

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