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.

4 Financial Tips for Church and Ministry Fundraising Events

Follow these fundraising financial safeguards to ensure that donations are collected securely and properly during charity fundraisers.

Churches and ministries often host fundraisers to support various projects like mission trips, community outreach, facility improvement and staff support. As non-profits, churches rely a great deal on the funds they raise and therefore they have to maintain financial security and trust from the donors which includes creating a secure fundraising atmosphere. Regardless of the size of the church or the number of staff members they use, it is important to maintain a professional approach to donation management and follow safeguards to ensure that church financial fraud is avoided and donors’ contributions are received where expected.

1. Ensure that equipment and food service conforms to safety standards.

Since many events involve food service or use of various equipment, it is a smart move to inspect these features for health and safety violations. If possible, use a certified inspector for conducting these inspections, so that there can be legal support if something goes wrong. If using a vendor, ask for references and qualifications before engaging them for an event. While these activities aren’t directly involved with fundraising finances, it is important to maintain safety in these areas for safekeeping of attendees and protection against lawsuits.

2. Require those responsible for fundraising events to submit financial reports.

According to a survey conducted by our church finance experts, a full third of the respondents have no reporting mechanism for special event fundraisers. While no one likes to assume that a volunteer working at a fundraiser will skim a little of the top, there is nothing wrong with requiring accountability, even as small as having them write and submit a financial report. Safeguards like written reports are a step in the right direction and, when coupled with other measures like multiple persons involved with managing funds and detailed records of tickets and/or products sold, the fundraising event has a better chance of avoiding theft and gathering funds successfully.

3. Secure funds as soon as they are gathered.

Regardless of whether funds are received at one time or continuously, it still should be a priority to secure cash and checks as they accumulate. Keep in mind that it is safer to entrust multiple people with the collection of donations, rather than just one with less accountability, so have at least two people in charge of transporting money from the collection to a safe room where the donations can be kept locked up and safe until counting and banking deposits. With volunteers providing sales reports and volunteers collecting the money, it should be a matter of routine to analyze the reports and totals to make sure they are in agreement.

4. Provide donors with receipts for their tax records.

Donors who wish to claim charitable donations for their federal income tax returns have to provide proof, either in the form of a bank transaction or a receipt from the charitable organization that received the donation. According to the IRS:

“An organization that does not acknowledge a contribution incurs no penalty; but, without a written acknowledgment, the donor cannot claim the tax deduction. Although it is a donor’s responsibility to obtain a written acknowledgment, an organization can assist a donor by providing a timely, written statement containing the following information:

1. Name of organization
2. Amount of cash contribution
3. Description (but not the value) of non-cash contribution
4. Statement that no goods or services were provided by the organization in return for the contribution, if that was the case
5. Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
6. Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described later in this publication), if that was the case”

Even though the responsibility lies with the donor to acquire proof of their donation, a charitable organization that offers the receipts to assist their donors with the task exhibits courtesy and gratitude. By making the proof of donation process simpler, fundraising organizers can encourage even more donations and facilitate the process of raising funds.

Weeds in the Garden provides financial consulting for churches and ministries

If you’re wanting to plan a ministry fundraising event and would like assistance with keeping donations secure and volunteers accountable, contact Weeds in the Garden. Experts at detecting fraud and preventing church theft, Weeds in the Garden has years of experience in church and ministry accounting and financial development consulting.


Segregation of Duties, part 3

Part 3 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:

“The individual who prepares the checks also mails the checks.”

“The person responsible for general ledger and financial reporting also mails the checks.”

Survey results – A little over 50% of the respondents answered the first question positively.  However, the number plummeted to 30% for the second.

Separate Accounting Tasks

You may wonder, “What’s the big deal about who mails the check?  After all, if the bill has been approved, reviewed and signed, isn’t the process over?”

NO!

KEY: Signing the checks is NOT the last step in the bill paying process.

Here are two things we have seen happen.

One person with this much responsibility was also skilled in the art of forgery.  Some of the checks signed were craftily altered and redirected to pay down his credit card balance (which had ballooned due to a problem with gambling).  Because this person was also in charge of all of the accounting process, there was little chance of being detected.

Another thief presented checks to be paid which were dutifully signed by the administrator.  But these are not the checks that were mailed.  The original checks were destroyed, and replaced with checks written to the bookkeeper’s creditors and to a brother-in-law.  As this person was in charge of the general ledger, the original checks were reflected in the cash disbursement journal.  The phony ones were not.  Obviously, this technique is risky because at some point the vendor not being paid will squawk.

Due to this risk, fraudsters who use this method are very selective in which vendors they pick.  For example, in one case a bookkeeper switched checks with their church’s contributions to its denominational national office.  Because these payments were voluntary, it took many months before the theft was discovered.

KEY: How to avoid this? See our next post on the importance of bank reconciliations.

Segregation of Duties, part 2

Part 2 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:

“From the time of collection to the time of the bank deposit, funds are never, even for just a few minutes, in the custody of a single individual or kept in an unsecured location.”

Survey results – More than 65% of the respondents stated that this is true for their church.

Cash Flow Systems

To avoid fraud, it is of paramount importance that a church has a clear understanding of both of its cash flow systems: inflow (cash receipts) and outflows (cash disbursements).

We recommend that churches, at least once a year, flow chart these two cash flow systems.  To help in this process, we suggest they compare their cash flows to the flow of water through the church’s plumbing system.  What they should be looking for are any points along the way where one person, by themselves, can turn on a cash flow “faucet”.  One of the overlooked phrases in this question is “even for just a few minutes.”

KEY: We are talking minutes, not hours – that’s all it takes for fraud to occur!

To illustrate this point consider what happened at one church.  At this particular church one usher serving the balcony, removed all of the cash from the offering plate and stuffed it in his shirt as he made his way down two short flights of stairs.  In this case we are talking seconds, not minutes!

 

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.

Policies and Procedures Manuals – Fraud Awareness in the Church – part 5

Part 5 of our ongoing Fraud Awareness in the Church series will address Policies and Procedures ManualsPSK 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 has compiled written financial, accounting, management and personnel policies in a central document such as an accounting and management policy manual.

Given the multitude of church management resources available and the myriad of church conferences that church managers can attend, it surprised me that only 50% of the respondents answered “yes” to this question.  The reasons for this low compliance rate puzzles me, but if I had to make a guess as to the culprit, I would say that it is because of the “tyranny of the urgent” environment that many church managers live in.  Because of their overloaded schedules many simply adopt the “Wac-a-Mole” management theory in which the administrators simply handle what pops up next.  As long as they are getting the job done, they see no need to document procedures.

Unfortunately, by doing this, they are ignoring the fact that not having written policies and procedures is not only a bad way to do business, it also exposes the church to fraud.  The reason?  Fraudsters HATE BASELINES!

Baselines help the church define “normal”.  Without normal or standard operating metrics it is difficult to determine if this year’s numbers are consistent with last year’s.  These blurred lines are a happy hunting ground for crooks.

KEY: Implementing a Policies and Procedures Manual will establish baselines and definitely help prevent fraud in your church!

Volunteer Training – Fraud Awareness in the Church – part 4

Part 4 of our ongoing Fraud Awareness in the Church series will address Volunteer TrainingPSK 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 formal volunteer orientation or training.

Over 60% of the respondents reported having formal volunteer orientation and training. The Church (universal) is arguably the greatest volunteer organization in world history. Without volunteers, there would be no church, or at least not an effective one.

But unfortunately, many churches take their volunteers for granted. One way I’ve seen this played out is the lack of volunteer TRAINING. Many churches send their financial volunteers into action with little, if any, formal preparation. Often, these individuals are pressed into service and simply try to do the best they can with little knowledge of the church’s policies and procedures.

There is a negative byproduct of not training volunteers: While the church’s policies may not change (after all, they should be in writing), procedures certainly will change. With the normal flux of volunteers coming and going procedures will be constantly changing as well.

In short, operational baselines will become blurred. And remember, fraudsters HATE baselines!

KEY: Volunteer training helps ensure a thorough knowledge of church policies and procedures, and thwarts potential fraud.

Conflict of Interest – Fraud Awareness in the Church – part 3

Part 3 of our ongoing Fraud Awareness in the Church series will look at Conflicts of InterestPSK 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 has adopted a formal conflict of interest policy.

Approximately 30% of the churches responding do not have a written conflict of interest policy.

It is important to point out that a conflict of interest policy is not a fraud preventative in and of itself.  The primary purpose of such a policy is to insure that a church or other exempt organization does not transact business with board members and executive level employees to such an extent that private benefit or inurement occurs.  When this happens, the parties involved can face some pretty serious repercussions with the IRS.  But a conflict of interest policy does play a key role in fraud prevention.

Creating a fraud-free environment involves much more than policies, procedures and internal controls.  It also involves setting the proper organizational tone, or atmosphere of financial accountability.  One element in the proper tone at the top is the implementation of a conflict of interest policy which limits transactions between the church and its employees, directors and significant contributors.

KEY: A conflict of interest policy is a strong ADVERTISEMENT to potential thieves that the church takes stewardship and accountability seriously.

Church Governance – Fraud Awareness in the Church – part 2

Part 2 of our ongoing Fraud Awareness in the Church series will deal with Church GovernancePSK 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.

Where Fraud Prevention Begins

Typically, when a CPA is asked about fraud prevention, he/she will launch into a long dissertation about the importance of internal controls.  To most accountants and administrators this is where fraud prevention begins.

I disagree.

Fraud prevention, in my opinion, begins with a strong organizational structure.  Internal controls are great, and necessary.  But, it is the organizational strength that sees to it that the internal controls are actually followed.  Without an adequate church governance program in place, the controls will not be consistent.

I can attest to this personally.  The WORST (by far) fraud investigation I have been involved with totaled in excess of $1.25 million dollars.  And, the theft did not start until AFTER the perpetrator had convinced the church to adopt a leadership team approach and abandon the more traditional committee approach the church had historically followed.

The leadership team consisted solely of church employees who answered to the culprit.  Once this system of NON-ACCOUNTABILITY was put in place, it was a simple proposition to dismantle what little controls the church had once had.

KEY – A strong church governance, which is characterized with good stewardship, accountability and transparency, is the first line of defense against fraud attacks. 

Next post we will begin taking an in-depth look at some of the questions we asked our participants to respond to, starting with Conflicts of Interest.

The Fraud Survey Numbers Are In

Last week I conducted two break-out sessions at the NACBA National Conference in Houston. During these sessions I reported the final results of the PSK/NACBA fraud survey conducted earlier this year. In the coming posts I will be sharing some of the information we gleaned from our survey.

Goal of the Fraud Survey

Before launching into this discussion however, it must be pointed out that this was not a scientific poll. Rather, it is simply a questionnaire answered by a little over 100 participants who were invited to participate. The goal was not to obtain specific answers to specific questions, but simply to gain a general understanding of the extent of fraud awareness in the church environment.

In fact, because the sample size was small and most of the participants (I assume) were NACBA members or churches with a high degree of management sophistication, I expected the results to be skewed to the high side.  *My opinion – If a scientific poll had been conducted, compliance indicators would have been MUCH lower.

As we go through the results of our fraud survey, you will notice that we (PSK) have grouped the questions asked of participants according to several “key” areas in church operations that are fundamental to fraud prevention. The first of these key areas – Church Governance.

The full list of topics are below. Stay tuned in the coming weeks for more of the same great fraud prevention tips you have learned to trust from Weeds in the Garden!

Results of the PSK/NACBA Fraud Survey – Upcoming Blog Topics:

  • Church Governance
  • Conflicts of Interest
  • Volunteer Training
  • Policies & Procedures Manual
  • Credit Checks
  • Segregation of Duties
  • Cash Disbursements
  • Payroll Fraud
  • Information Technology
  • Payments to Individuals
  • Fraud Prevention Programs

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