Our Fraud Awareness in the Church series continues with part 2 on Fraud Prevention Programs – Fraud Reporting. We asked churches to respond to this statement:
“Our church has established appropriate channels for reporting and resolving sensitive issues like fraud and illegal acts. (Examples include establishing an anonymous fraud hotline, posting notices, etc.)”
Survey Results: Only 40% of the respondents have established any form of fraud reporting mechanism.
KEY: Key Point: Statistics make it clear that the most common method of fraud detection is anonymous tips!
Few churches have the stomach or the nerve to do what businesses and local governments are increasingly doing. For example, A “Report Fraud” link on a school district’s or city’s website gives comfort to most taxpayers. But, the same people would choke if they saw a fraud tip hotline on their church’s website!
One solution I have seen:
A church contracted with an HR services firm to take care of all of their payroll compliance issues such as wage and hour laws, discrimination, workmen’s comp, immigration, etc. The HR company also drafted the church’s personnel manual which included an 800 number hotline. The HR professionals maintain the hotline assuring that all fraud reporting remains confidential.
Our Fraud Awareness in the Church series continues as we look at Individual Payments: Contractors and Benevolence. We asked churches to respond to these statements:
“Before paying an individual as an independent contractor, our church applies IRS compliant tests to determine if the payee qualifies as an independent contractor.”
“Our church has written a policy to direct benevolence payment activity.”
With two notable exceptions, tax-exempt organizations are not to transfer assets or make payments to individuals. The two exceptions are Contractor payments — reasonable compensation for services provided the organization, and Benevolence payments — to individuals who are the target of the organization’s exempt purpose (rent assistance, etc.). Outside of these two exceptions, all other payments are looked upon with a degree of skepticism by the IRS.
Survey Results: Surprisingly, 40% of the respondents do not go through a formal employee vs. contractor test.
Key: Embezzlers tend to shy away from reporting their theft to the Government. If ALL payments to contractors are screened and a 1099 prepared, a fraud loophole is closed.
Another area particularly vulnerable to fraud is benevolence. Again, 40% of the churches do not operate under a written benevolence policy.
Key: Benevolence funds are one of the few accounts where payments to individuals are not suspicious. (Fraudsters are very aware of this fact.)
Double Key: Part of the benevolence policy should be to NEVER give funds directly to the people being helped. Make payments directly to 3rd parties. (Utility company, landlord ,etc.)
Our Fraud Awareness in the Church series continues as we look at Information Technology Security. We asked churches to respond to these statements:
“Our church has a formal information technology security plan.”
“Our church financial secretary or accountant/bookkeeper has access to all modules of the church’s software system.”
Churches struggle to keep up with the challenges of the rapid change in information technology. Even when they want to address the issues in the two questions above, the workload crush of most churches makes it very difficult to stop the train long enough to develop a good IT plan. This is clearly (to me) reflected in the:
Survey Results: Only 50% of the participants have implemented a formal information technology security plan.
In another indicator of the impact workload pressure has on fraud protection, a whopping 80% of the churches surveyed confessed that their accountant/bookkeeper had access to ALL of their church’s software applications.
In the vast majority of churches this large degree of “trust” is placed in the hands of very good people and a problem never arises. But if, just once, a church employs an individual given to theft and gives him or her this much access…trouble is probably just around the corner.
In PSK’s Faith Based Accounting Blog I posted an article titled “Taking IT for Granted”, where I addressed this issue. The following are a few questions each church should ask itself when developing strong IT controls:
- Does our church have a formal Information Technology security plan?
- Do any individuals at our church have access to all modules of the church’s software system?
- Does our church partition its computer applications so that employees and volunteers have access only to files necessary to perform their duties?
- Does computer access require passwords that are confidential and unique?
- Are our passwords changed periodically?
- Are passwords complex including alpha, numeric and case sensitive characters?
- Do we have backup procedures that are performed regularly that include off-campus storage?
- Do we have measures in place to protect the church from malware?
- Do we train our employees to avoid accepting email from unknown locations?
- Do we have a download policy?
- Do we maintain separate public and private wireless networks?
Our Fraud Awareness in the Church series continues as we look at Payroll Fraud and Phantom Employees. We 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.”
Our Fraud Awareness in the Church series continues as we look at Payroll Fraud. PSK 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:
“Each quarter we reconcile the total payroll amounts on the quarterly payroll reports (941s) to the total payroll amounts recorded in the payroll journal and general ledger.”
Survey Results – 75% of the churches reported performing this task.
I was surprised by the strength of these numbers. In my experience, reconciling the quarterly 941 total wages with the salaries and wages reported in the church general ledger did not seem to be a common practice. As a matter of fact, many times when our auditors would attempt to do this, the chore was almost impossible.
Why? Because churches usually have a multitude of salary/wage general ledger accounts. AND other expense items remotely connected to personnel issues are often “dumped” into the payroll line items. I repeat, reconciling payroll is one of auditors’ most difficult tasks. Which makes my point.
KEY: Fraudsters prefer to hide in the tall weeds. (Big numbers)
Thieves try to hide their deeds in the big numbers, or accounts that have a great deal of activity. The reason is simple: their actions will not stand out there. The biggest of the big numbers for a church is PAYROLL.
KEY: You must know what is going on in your payroll accounts to avoid payroll fraud!
Part 5 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to these statements:
“Our church issues credit cards (in the church’s name) to employees and/or volunteers.”
“Our church has implemented a written credit card policy to control credit card purchases.”
Survey Results – The first question had the largest variance between all respondents (58%) and respondents active in the NACBA (43%). My assumption is that because NACBA members, through local chapter meetings, certification training, and the national conference, have heard plenty of the horror stories about credit cards “gone wild”.
It remains a mystery to me why churches handle credit cards in this manner (i.e. giving cards to ministers in the church’s name). It is definitely not the practice in the business world. Even if a corporation does issue corporate cards, the employee’s name is on the account too. The employee pays the bill after being reimbursed under an accountable plan. But if no backup is produced, or a personal expense is incurred, the employee pays the bill.
My worry that so many churches issue credit cards is somewhat alleviated by the results of the second question: Of the churches that hand out credit cards, almost three fourths have a written credit card policy in place.
KEY: A word of warning. The worst fraud investigation of my career was in the 7 figure range. 75% of the theft was accomplished with church issued credit cards.
Part 4 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:
“Our church has established a “Positive Pay” program with our bank.”
Survey Results – Less than 5% of the respondents use such a program.
While the phrase “Positive Pay” is the trade name of one commercial bank, it has become a generic term for an agreement between a bank and its customer that works like this:
- The church establishes a standard routine for paying bills, for most churches once each week.
- A list of approved bills is compiled and transmitted to the bank.
- The bank only clears checks or other charges presented for payment that are on the church’s list.
- The church is also informed of any checks or charges presented for payment that were not included on the list.
Increasingly, businesses are using arrangements like this to address a newer face of economic fraud. Fraud experts have historically used the “fraud triangle” of pressure, rationalization, and opportunity to describe the key ingredients of a fraudulent act. Generally, this discussion has focused on “inside jobs”.
However, with the advance of technology, a new face has arrived on the scene – the “hacker” completely outside the organization (in many cases completely outside the country!). Using Positive Pay is one protection against this type of fraud activity.
Perhaps a new leg needs to be added to the fraud triangle. (I guess that would make it a square…)
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.
Part 2 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:
“Our church uses pre-printed, pre-numbered purchase orders or check request forms to initiate purchases.”
Survey results – The positive response to this question was extremely low, causing me to believe that the question was poorly worded. It should have included the use of electronic purchase orders generated by most church management software.
Not being able to rely on the survey results, however, does not keep me from sharing the main point.
KEY: A documented approval and bill payment process is a must!
Keep in mind one of our previous posts: Fraudsters Hate Baselines. A well documented bill paying system forms a part of the baseline.
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!