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.

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.

Credit Card Policy – Fraud in the Church – Survey Results part 12

Part 12 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church has implemented a written credit card policy to control credit card purchases.

Ok, I know I was a little harsh in the last post…  I guess it’s because I have seen too many credit card train wrecks!  The million dollar event I discussed in the last post was definitely the largest, but I have seen many of its smaller brothers and sisters.

Although over 80% of the surveyed churches issue church-named credit cards, the results of the next query gives me some comfort.  70% of these churches have implemented a church credit card policy to monitor credit purchases.  Unfortunately, that leaves nearly a third with no documented policies to give oversight over credit card purchases.  Based on the things I have seen, these 30 percenters are living on the edge.

It is imperative that any church issuing credit cards to employees and volunteers has a credit card policy to lay down usage guidelines.

At a bare minimum a church credit card policy should:

  1. Limit the dollar amounts of single purchases, and
  2. Restrict the use of the cards to certain businesses.

What would you add to these two requirements?

Credit Card Fraud – Fraud in the Church – Survey Results part 11

Part 11 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church issues credit cards (in the church’s name) to employees and/or volunteers.

At a response rate that came as no surprise to me, 86% of the churches who took part in our survey issue credit cards to employees. It continues to amaze me how many churches follow this practice. Seldom do we see this in our work with commercial clients. Most businesses with accountable business expense reimbursement plans require employees to use their own cards. This is particularly true with smaller organizations. Some larger companies do issue corporate cards, but all of them I have seen keep the employee on the hook by including the employee on the account: The employee pays the bill AFTER being reimbursed by the company. Employees of businesses that follow this procedure tend to be more responsible credit card users because there is always the possibility that their employer may say, “NO!”

Why do we consider the issuance of credit cards (in the church’s name) a fraud risk? I have a simple answer:

The largest church credit card fraud investigation I have conducted resulted in more than one million dollars in losses.

Illicit use of just two credit cards was responsible for 75% of the theft!

Without sufficient oversight, credit cards can turn the entire purchase approval system on its head. I have seen it happen…

Church Payroll – Fraud in the Church – Survey Results part 8

Part 8 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church reconciles payroll quarterly reports with the payroll journals and general ledger.

Almost 25% of our respondents do not perform this relatively simple task. I can show you plenty of news reports of churches who wish they had!  Occasionally, I need to point out the obvious; thieves do not like to get caught!  To remain successful at this, they have to hide in the tall weeds. This means they are going to target the big numbers in a church’s financial statements.  And the biggest of the big numbers is payroll cost.

Typically, payroll makes up 50% of a church’s operating budget.

For example, if a church has a one million dollar budget, a thief can easily find cover among $500K of tall weeds!

To avoid being the victim, churches should take care to:

  • Know who their employees are
  • Know how much their employees are paid
  • Periodically review activity in the payroll general ledger accounts
  • Compare payroll reports with budget totals.

Purchase Orders and Check Requests – Fraud in the Church – Survey Results part 5

Part 5 of our ongoing Fraud in the Church series. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent to which churches are attempting to address the problem of church fraud. We asked them to respond to this statement:

Our church uses pre-numbered purchase orders or check requests.

Theft of cash receipts, particularly offerings, garners the most attention by churches in their fraud prevention practices.  However, the largest dollar-loss incidents tend to occur in the bill paying arena.  In most of the check writing fraud cases I read about I see the same four ingredients which allowed the theft to take place:

  • Poor segregation of duties
  • Failure to pay attention to the bank reconciliation process
  • Poor security over the church’s check stock
  • Absence of a formal bill approval and payment system

The starting point of a formal bill payment system is the utilization of preprinted (or computer generated) sequential purchase orders or check requests.  The absence of such a system can be the beginning of sorrows for a church.

Approximately 54% of the survey respondents reported not using proper documentation to begin the bill approval process.

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