Church Fraud Detection: 6 Signs of a Con Artist

Fraud in the Church Detection with Weeds in the Garden Fraud Prevention Experts

Church leaders and nonprofit board members need to know how to spot a con artist. Affinity fraud is incredibly damaging to ministries. Con artists are often well polished and smooth. Often, people are surprised after the fraud or con has been committed. Fraud prevention isn’t just for large multinational corporations. Churches and other nonprofit organizations are at an increased risk due to the donations and grants they receive. Listed below are six different warning signs that a person may be a con artist.
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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.

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?

Church Secretary Takes Her Church for $200k

What went wrong at this Church? How could this one employee make off with $200k of funds raised for her congregation and parochial school? Read the full article here. Simple financial controls may have prevented this! Does your Church have adequate internal controls? We can help!

Source: Journal Sentinel Online – Milwaukee

Red Flag # 2 – Bringing personal financial problems to work.

According to the Association of Certified Fraud Examiners, the second most common red flag is financial difficulties of individuals involved in financial matters of an organization.  The occurrence rate of 36% consists of reported frauds at all levels of the organizations victimized.  However, if we look solely at frauds committed at the employee level (disregarding frauds committed by managers) the rate soars to almost 50% of all fraud cases.

This makes sense because employees receive lower compensation compared to the management level.  When unexpected financial events occur, they are less likely to have a “rainy-day fund” set aside to get them through.  This can lead to poor judgment in several areas, the first of which is usually excessive use of credit cards.  When these individuals find it difficult to climb out of their debt problem and they might focus on other areas of relief, one of which is their employer’s money.

Once again, I must stress that the presence of these circumstances is proof of nothing, but organizations must keep in mind that personal financial difficulties are a common denominator in a great many fraud occurrences.  But, how can a church leader address this possibility?  Here are three thoughts.

  • In addition to performing the normal background check, a church might consider performing annual credit checks on employees involved in the financial activity of the church.  It is not too much of a stretch to say that if you hire someone with a poor credit history, you have hired their problems as well.  Keep in mind, that credit checks generally require the employee’s permission
  • Provide financial counseling for employees.  This is another way to discover if any employees are struggling with finances.  But it also helps the church relieve some of the pressure an employee may be experiencing by providing a way out of their dilemma.
  • Finally, and most importantly, you must close down the opportunity of fraud.  In most of the church fraud cases I have read, the most common characteristic is terrible segregation of duties.  Often, one person is in charge of all of the church’s financial tasks.  When you combine these two ingredients: financial troubles and total control of a church’s financial activities….

Well, you can guess the rest.

Red Flag #1 – “I can resist everything except temptation.”

I doubt that Oscar Wilde had church fraud in mind when he penned these words, but they do describe the nature of many embezzlers.  Occasionally, the irresistible temptation to treat themselves to luxury items overrides a thief’s need to keep hidden.   Ultimately, this inability to resist temptation brings unwanted attention to the culprits in the form of things like fancy cars and exotic travel. For example, several years ago a treasurer of a church organization was convicted and sentenced to five years in prison for embezzling more than two million dollars.  Infuriated by what the judge termed a “spurious psychiatric defense”, the judge went on to describe the treasurer as a “common thief” who looted church funds to live the life style of someone she was not”.

Employees suddenly and unexpectedly living beyond their means can be significant red flag.  In fact, according to one report, this situation is the most prominent red flag, present in more than 43% of reported cases.

However, we do need to be careful with this red flag.  An employee suddenly living above his means is not proof that fraud has taken place.  Some people do have rich relatives who leave them money. (Just not in my family…)

Red Flags

Typically there are three ingredients that must be present in order for a fraud to take place.  Commonly referred to as the “Fraud Triangle” these three ingredients are:

  • Pressure – Forces playing upon individuals in positions of financial responsibility that would make them begin to contemplate doing something they otherwise would have never considered.  Frequent types of pressures are unexpected medical costs, job termination or business reversals of a spouse, addictions and a need to “keep up with the Joneses”.
  • Rationalization – The self-talk perpetrators engage in to convince themselves that what they are about to do (or are already doing) is ok.  For example, the number one rationalization is “I’m not stealing; I will pay it all back.”
  • Opportunity – The ability to take advantage of a church without getting caught. Sadly, the most common opportunity for fraud in the church environment is the situation where one bookkeeper has total responsibility for and access to the church’s accounting system.

Generally, a church business administrator has significant control over only one of the Triangle’s legs; Opportunity.  Unfortunately, much of the influence of the other two legs, pressure and rationalization, are out of a church’s control; a church has very little influence on outside economic pressures its staff faces.  And, a church has virtually no control over the thought processes of its employees and volunteers.

Key Point – But, there is one thing that can be done – A Church Business Administrator can (and should) become a keen observer of his or her staff and volunteers.

Every two years the Association of Fraud Examiners (ACFE) publishes its Report to the Nations.  In this document, the ACFE summarizes data compiled from fraud incidents reported to it by member Certified Fraud Examiners.  One interesting part of the 2010 report is “Behavioral Red Flags”.  These red flags were compiled by victims of fraud, who on reflection recalled certain behavioral changes on the part of the fraudster.  Unfortunately, if these red flags would have been noticed earlier, the frauds could have been curtailed at a much earlier stage.

In our next series of posts we will share a few of the most common red flags.

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