Fraud in the Church – What the Survey Tells Us

The occurrence of occupational fraud in the church community continues to rise at epidemic proportions.  Evidence of this is found in the steady flow of news accounts reporting churches hit with fraud:

Speaking Engagement: The Effects of Church Fraud

Weeds in the Garden’s Verne Hargreave spoke on Church Fraud Deterrence  at RockPoint Church in Flower Mound Texas.

Here is a great article outlining the highlights…

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).

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.

Comprehensive Human Resources Planning

Except in the rarest of cases, personnel costs are the single largest expenditure of a church.  Because churches are in the “service industry”, it should come as no surprise that forty-five to fifty percent of the typical church budget will be dedicated to employee related costs. 

This highlights a basic principle in the behavior of an embezzler.  For obvious reasons, people committing fraud prefer to remain anonymous.  In order to enjoy the fruits of their labor they must remain hidden.  It is much easier to hide fraud among the bigger numbers – like payroll.

Key: As a result, personnel costs are a favorite target of fraudsters.  Usually, fraud in this area is small-time with one employee falsifying their own time card or submitting phony expense reports.  However, some payroll frauds can be quite extensive and creative.  The more spectacular (and costly) may involve:

  • “Phantom” employees
  • Fraudulent insurance claims
  • Bogus tax refunds. 

These scams can easily run into the tens of thousands of dollars.

Churches should not be naïve about payroll fraud.  Because churches are as vulnerable to personnel fraud as businesses, they should do two things. 

  • First, repeating the theme of a previous section, churches must follow the IRS compliance guidelines.  This means designating an independent compensation committee to set compensation amounts, based on market comparison information, and documenting all decisions made.  At a minimum, this process should be followed for executive level staff but is also a good practice to follow for the entire church staff.
  • Second, churches should also follow a “best practices” approach in human resources administration.  In addition to contributing to a healthy workforce these best practices also contribute to eliminating the possibility of fraud.  A few of these practices are:
    • Establishment of formal job descriptions
    • Performing background checks
    • Performing regular performance evaluations and obtaining written termination letters from departing employees.

Awareness of ALL Sources of Revenue

Any discussion of church tithes and offerings practices usually includes both a pat on the back and a criticism.  First, in regard to the normal Sunday offerings I can say to most churches, “Way to go!”  In fact, when I ask a client if they have taken any fraud prevention steps, the first thing usually mentioned is how much the church has done to protect the offering plate.  Seldom do I encounter a church that does not have multi-member count teams, rotating terms of service, locking bank bags, dual-access safes and in an increasing number, the use of an armored car service.  I would venture an educated guess that the majority of churches have more than adequate controls over Sunday receipts.  For some, Fort Knox would be an easier target.

But in regard to the rest of the money, the funds that come in during the rest of the week, I often have to say, “What were you thinking?”  While being diligent to a fault on Sunday morning, almost anything and everything goes the rest of the week.  Here are two in my hall of fame:

  • Offerings, fees and other receipts arriving in the mail or dropped off by members are simply dumped on the financial secretary’s desk.  I have entered offices with large piles of unguarded cash on the accountant’s desk more times than I can remember.
  • Special events funds sometimes are “managed” by a volunteer.  The funds are kept off campus and are not turned over to the business office until the event is over.  No accounting or reconciliation of goods sold is required.

Needless to say, some of our more interesting and sometimes humorous fraud stories occur in these two areas.

However, this is no laughing matter, because a significant “event” could cause irreparable damage.  That being the case, definite steps should be taken.

  • First, a brainstorming session could be held, the purpose of which is to determine all sources of income. 
  • Once identified, all sources should be included in the church’s normal collection policies and procedures. For example,
    • For weekday drop-offs and mail-ins, a lock box could be kept in the church’s safe in which all of these receipts would be placed unopened. 
    • A separate log or register should be maintained to keep a record that the amounts were received. 
    • On Sunday, the box could then be opened and counted by the teller team on duty.

Compliance with the Tax Laws

Churches tend to have only one motivation for staying in compliance with the tax laws.  And that is staying out of trouble.  Churches practice compliance with the Internal Revenue Code primarily to avoid unnecessary penalties and interest, protect their tax-exempt status and stay out of the news. 

The prevailing attitude is “We do these things because we have to; the government is making us.”  Most church’s see no benefit in compliance other than staying in the government’s good graces.  The resulting tendency is many do just enough to get by.  But, by having this attitude they are missing another very good reason why compliance is helpful.  Key: Being serious about government compliance also provides another level of fraud resistance.

Knowing where many of these laws came from makes the same point.  Our governments aren’t really very proactive.  Contrary to popular opinion, they don’t dream up rules and laws just to be belligerent, they are more reactionary.  Many of the rules churches must comply with were implemented in reaction to some type of bad practices or abuse of existing regulations.  A very good example is the charitable contribution substantiation rules.  One of the reasons for their coming into existence was the tendency of some people to deduct tuition payments to the church school as contributions.  Also, “accountable reimbursement plans” are the result of abusive employee business expense deductions during the 1980s.  Although it may come off sounding harsh, the fact is both of these practices, mischaracterizing payments as contributions and inflating expense reports, are forms of fraud the government wishes to eliminate.

The purpose of strong IRS compliance is not simply to stay out of trouble. Key: Doing what the government asks will also close down some favorite targets of individuals committed to stealing from the church. 

A fraud resistant church should take steps to be in compliance with IRS regulations regarding:

  • Ministerial taxation
  • Personnel benefits
  • Business expense reimbursements
  • Credit card use
  • Benevolence
  • Contribution substantiation.

Full Disclosure Financial Statements

Another practice of many churches plays right into one of a fraudster’s strengths, the ability to withhold information.  Perhaps in an attempt to avoid interminably long finance committee meetings brought on by micro-managing members, or more likely, fearful that the messenger is going be killed, some church administrators tend to hold back on the financial facts. Key: Failure to present full-disclosure financial statements is the most common way of holding back information. 

Instead of traditional financial statements, a church may elect to present summary information in an attempt to control the facts.  Making matters worse, they may also use electronic spreadsheets to do the work.  Although spreadsheets are very powerful and useful, they have one major flaw: the preparer is in total control over what goes into the report.  There are no balancing requirements as with a normal set of financial statements based on a double-entry accounting system.  Some crooks have one word to describe this situation. Disneyland!

Financial statements are simply another form of communication used to convey the financial situation of the church.  Their goal, in the church environment, is to answer a few basic questions:

  • How much cash do we have on hand?
  •  Is any of it restricted? 
  • What kind of assets do we own? 
  • Who and how much do we owe? 
  • How did we do this year?
  • Did we stay within budget?

            Key: To answer all of these questions adequately, a church must present a full set of financial statements.  This includes at a minimum, both a balance sheet and an income statement.  (These are business terms; the corresponding non-profit titles are statement of financial position and statement of activities, respectively.)  In addition, if a church has a high volume of restricted activity, a separate schedule of restricted gift activity should also be presented. 

Not only does “summary reporting” result in an uninformed church.  It can also result in a victimized church.  A church with a history of being satisfied with summary reports combined with poor personnel decision-making may end up with an embezzler having the best of both worlds; being able to take what he wants from the church and covering up the evidence with his own reporting system.

A Written Organization Plan

Establishing an organizational structure is the first step in combating fraud, however it is not enough. Key: In order to stay within reasonable boundaries, churches must take the time to carefully document their management structure and practices.  Churches that fail to do this do so at great risk. 

A written organizational plan serves several purposes. 

  • First, it serves as a compass providing direction for the church as it navigates through difficult decisions. 
  • Similarly, the organizational documents serve as a map, helping the church chart courses of action of a more long-range nature. 
  • Finally and directly related to fraud prevention, documentation serves as an anchor, keeping the church from drifting into dangerous waters. 

For this discussion, I have grouped documentation into three categories.

  • Corporate records of the church are the first consideration.  All churches should have in place a practice of insuring that their articles of incorporation, by-laws and/or constitution are up-to-date and in compliance with federal, state, and local law.  This is best accomplished by engaging legal counsel familiar with church and exempt organization law to perform periodic reviews of the corporate documents.
  • An accounting and management policy and procedure manual is a must in the battle against fraud.  Fraudsters do not like consistency because it forms a base-line upon which to make quick and simple comparisons.  Having a central document, such as an accounting and management policy manual, provides a proper back drop for church operations.  Without creating a massive “code of regulation” the policy should be comprehensive.  At a minimum, typical topics included should be organizational structure, budget development, cash receipts and disbursement procedures, financial reporting and personnel administration.

Documents specifically aimed to reduce fraud should also be included in a church’s policy and procedure portfolio.  Written policies should be created that address conflicts of interest, business expense reimbursements to employees and volunteers, credit card use, benevolence, and building and property use.

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