A close cousin to ignoring the bank reconciliation is maintaining an excessive number of bank accounts.
Rather than using their church accounting software to take care of measuring and tracking restricted giving, some churches open separate bank accounts for each new special gift that may arise.
This results in a number of problems:
Burdens the accounting staff with extra work and contributes to the poor bank reconciliation management we discussed in the previous post.
Creates a great opportunity for a fraudster to play a very effective “shell game”. With multiple bank accounts and limited controls, an embezzler can shuffle funds among the accounts to create a dense smokescreen, making detection extremely difficult.
Key: The best practice is to gave as few bank accounts as possible coupled with strong internal controls and recordkeeping.
One of the more serious traps churches can fall into is poor bank reconciliation practices. Some of the ways we have seen this played out:
Due to understaffing and time pressures, bank accounts are not reconciled for months at a time.
Bank reconciliations are not complete consisting only of checking for cleared checks and surface level comparison of bank statement balance with the general ledger balance.
The bank reconciliation is prepared by the same person responsible for check writing, general ledger, reporting etc
There is no review of the bank reconciliation by supervisory personnel.
All of these things seem to take place because the church staff and volunteers have a poor understanding of the importance of the bank reconciliation. The bank reconciliation is the “Grand Central Station” of an organization’s financial activity. With the exception of a few, usually immaterial transactions, (such as petty cash disbursements) every transaction will flow though the bank accounts of a church. Performing the bank reconciliation on a timely basis helps insure the viability of a church’s financial reports. Additionally, having an independent reconciliation is one of the most effective fraud prevention measures.
KEY: Make sure your bank reconciliation tasks include:
A comparison of dates and deposit amounts with teller team reports
Investigation and documentation of transfers between bank accounts
Accounting for the sequence numbers of checks written.
Examination of cancelled checks for suspicious signatures, endorsements or other alterations.
Comparison of payees on cancelled checks with the approved vendor list.
Review of voided checks.
Many churches fail to implement a well defined purchase approval and payment system
There is a great difference in attitude in the church environment between receipts and disbursements. While churches exercise extreme vigilance over the “inflow” of funds into the church, many have a rather cavalier attitude towards the “outflow”.
Churches also tend to rely on a few “fraud prevention” methods which in my opinion provide little more protection than a security blanket. They may give a warm and fuzzy feeling, but are no help in a real crisis. The two I hear most often are the requirement of dual signatures for checks over a predetermined amount and the requirement that a check request form be filled out before anyone gets paid. It is not uncommon for these to be the only two “fraud prevention” controls exercised over cash disbursements.
KEY: Churches that rely on methods this simple are unaware of two basic facts. First, dual signatures and homemade check requests are absolutely no match for an ethically challenged employee with the courage to forge. Second, and this may be the most surprising, many of the larger and more spectacular embezzlements involve tampering with the church’s cash outflow, not the inflow.
An important element of proper stewardship is to develop, implement and live by a well defined, written bill approval and payment process. Some key ingredients of such a plan:
A clear description of who will:
Validate invoice with purchase order and receiving documents
Prepare checks for payment
Record transactions in the general ledger
Use of pre-printed, sequentially numbered purchase orders, not check request forms that anyone can duplicate on a copy machine.
A vendor application and approval process culminating in an approved vendor list
Write checks and/or make drafts only to vendors on the list
Consider using a Positive Pay program in partnership with your bank.
Because of staff size many churches have poor segregation of tasks
Next to the absence of well-defined, written accounting and management policies, the most common weakness we have noticed in churches is the lack of adequate segregation of duties. In other words, the accounting tasks are not spread out among enough individuals. This is usually due to budget constraints, as churches tend to fund ministries first, then whatever is left is applied to administration. Whenever possible, accounting tasks, particularly those involving cash transactions, should be divided between several individuals to limit the possibility or even the appearance of the misuse of funds. There are two main purposes for developing a strong segregation of tasks:
First, strengthening the accounting control system protects the Church from the misuse of funds and loss of assets.
KEY: Second, proper segregation of duties protects Church staff and volunteers from unwarranted charges of impropriety. In my opinion, this is the most important reason for spreading the work around as many people as possible. We must never forget that in volunteer organizations, the appearance of improprieties can cause as much or more harm than actual occurrences of theft or embezzlement.
All churches should investigate ways to protect itself and its staff by finding methods to segregate as many of the accounting duties as possible. Here are some of the weaknesses we have seen in segregation of duties:
Often a church’s offering count teams are made up of the same individuals who perform the task week in and week out. Action Step: Make an effort to enlist as many people as possible to serve as tellers. Also, include a planned rotation of the counters
Many churches on Sunday mornings, store their offerings overnight in a safe that does not require dual access. Action Step: When money remains on Church premises for over twenty-four hours, use a safe that requires the participation of two individuals to unlock. (A less expensive way to do this is use lockable or tamperproof bank bags and assign separate custodianship of the bags and access to the safe)
By far the most common weakness is the habit many churches fall into of allowing the church financial secretary/bookkeeper to be involved in every aspect of the accounting process, particularly those involving cash. Action Step: The church bank account is the “Grand Central Station” of a church’s business activity. One of the most effective steps that can be taken to provide segregation of duties is to remove the bank reconciliation task from the bookkeeping department and assign the work to another employee or volunteer.
In Indianapolis today, the courts upheld a man’s 54-year sentence for pocketing millions intended for the construction of churches. This man defrauded nearly 3,000 people. Who do you trust with your money? Is your Church doing all it can to protect its contributions and accounting personnel?
In any business, having a high level of confidence in the amounts that are owed to various vendors is crucial. This fact is no different within our churches. The key to having this confidence is making sure adequate recordkeeping is maintained. Best practice guides stress that you should always have a consistent method for entering all invoices into your accounting system with the correct information provided on the invoice. This includes invoice number, invoice date, due date, amount, and a description of the products/services indicated on the invoice.
With all accounting software, you should be able to pull a report from your system that will show you a list of all unpaid invoices including the vendor name, invoice date, due date and amount. Having this report can help you examine various things; for instance, are there any accounts payable items that are significantly past due? If so, these should be researched further. Perhaps they have been paid, but due to an incorrect posting, were not removed from the accounts payable list, or maybe a certain invoice was mistakenly overlooked and is truly past due and, therefore, would need to be paid. Also, if there are ever any disputes with vendors over amounts owed, the accurate recordkeeping will give you the assurance you need in order to know whether or not the amounts have been paid in full.
From a fraud perspective, having the Church Governing Council review the unpaid invoice details regularly can hopefully uncover a possible fraud in the early stages.
What methods does your Church use to ensure accurate recordkeeping? Who reviews the unpaid invoice listing and how often?
–Tia Fisher is a Senior Auditor specializing in church accounting with PSK LLP.
Who’s looking after your Church’s financial personnel? Are the necessary checks in place to, if not prevent fraud, catch it quickly? $51,000 may not be much to lose if you’re at a mega-church, but to a smaller Chuch in Indiana, it was. The full article can be found here.
Source: WISH TV 8 News
At that announcement the line begins to form.
Cash disbursements are easily the most manipulated, error prone process of any organization. Without proper controls and oversight in place, and in practice, money doesn’t have to grow legs and walk – it gets handed out. Maintaining an internal audit process of this area is essential and very easy.
Review the written policy covering the procedures for all transactions paid through the organization. The procedures should include the requirement for support of all disbursements, including the rare petty cash reimbursement.
Review documentation, such as a voucher or request form; it should be completed with the place, amount, and purpose along with the original receipt (dated within 60 days of the request) and a copy of the issued check or stub. Verify check stock is secure and account for all check numbers, including voided checks.
As an added measure, review the most recent cash disbursements against the general ledger to ensure they are recorded accurately.
Does your organization have an accountable reimbursement plan? Do you ever have a hard time getting receipts from employees?
– Lisa Chapman is an auditor specializing in church accounting at PSK LLP.
Many churches think that an external audit is the best way to prevent fraud from occurring, or at least to detect fraud once it has occurred. I’m an audit partner, so I don’t encourage churches NOT to have financial audits! Financial audits are important and I believe most churches/ministries should have one. But the primary purpose of an audit is not to detect fraud, and there are more effective ways to protect your church from fraudulent activity.
The Association of Certified Fraud Examiners (ACFE) says that a much higher success rate exists for those who take matters in their own hands, doing some of the work themselves, rather than farming out fraud prevention to their auditors.
Management review and internal audit steps account for more fraud detection that anything else! These are steps that church leaders (finance committee, elders, board members, etc.) can perform.
In this blog, over the next couple of months, we’ll discuss a variety of concrete ways you can examine yourselves to see how your church might be susceptible to fraud – and what you can do about it!
And don’t forget our website dedicated to Church Fraud – http://weedsinthegarden.com/
The National Association of Church Business Administration hosts its annual conference next week in Orlando (July 19-23). Always lots interesting conversation and insightful presentations at these annual gatherings! I encourage you to attend Verne Hargrave's presentation on Church Fraud. What he has to say will scare you to death, but also give you the tools to greatly reduce fruad risk.
NACBA website www.nacba.net
Verne's website www.pskcpa.com