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!

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.

Cash – 3 Musts for Your Ministry

Segregation

One of the most important measures your ministry can take to protect cash and YOU is implement segregation of duties, i.e. no single person should have control of the cash process.

Ensure that the function of counting contributions and receipts is segregated from the depositing, general ledger and reconciliation functions.

Accountability

Accountability means that ALL cash is accounted for, properly documented, secured and traceable. When accountability is implemented properly, the ministry is able to answer the 4 W’s at any given time:

  • Who has access to cash
  • Why they have access to cash
  • Where is cash at all times
  • What has occurred from the transaction’s beginning to the end

Reconciliation

The monthly bank reconciliation is the single most important control that ties everything together. It allows the ministry to ensure that all cash transactions are accounted for and properly recorded. Once the reconciliation is complete, it should also be reviewed by someone other than the preparer for accuracy, i.e. the business administrator, member of finance committee, your CPA etc.

Mentors Matter

“Joash did what was right in the eyes of the LORD all the years Jehoiada the priest instructed him.”  (2 Kings 12:2)

Joash “came to power” at the ripe old age of seven.  His life can be divided into two stark contrasting periods:

  • The time when Jehoiada was high priest. – Joash was instrumental in restoring the temple and reinstituting its services.
  • The period following Jehoiada’s priesthood  – Joash was instrumental in reinstituting the worship of Asherah poles and idols

What went wrong?

Joash’s life teaches two important lessons about mentoring.  First, his life illustrates the tremendous impact a godly mentor can have on a leader.  As verse two tells us, as long as Jehoiada was there to coach and counsel Joash, Joash did what was right.  While Jehoiada was alive, Joash inspired the people to give sacrificially to the temple restoration campaign.  With the funds in hand he was able to see that the temple was restored from neglect and vandalism.  Most importantly, with Jehoiada at his side, Joash was able to reinstitute the long neglected burnt offerings. 

However, Joash’s life teaches a lesson; what can happen when a leader has no mentor.  Like Joash, a leader with no mentor can easily succumb to bad advice.  After Jehoiada had died, Joash “listened to others”.  He abandoned the temple and shortly thereafter his people fell to worshiping foreign gods.

KEY: A good financial mentor is an invaluable resource to a pastor.  This is true regardless of the experience level of the minister. From just beginning in ministry to closing in on retirement, every pastor, at every stage of life, needs financial counsel they can rely on.  Unfortunately, most pastors have limited knowledge and experience about money and management.  Because of these limitations, no pastor can afford to play “Lone Ranger.”  Someone a pastor can confide in and rely on is essential.  But, care must be exercised in selecting the right guide.

  • A mentor should not be chosen on financial ability or business acumen alone.  The mentor needs to be someone on a spiritual journey himself.  Just because a person is good in business doesn’t mean he will be good for the church.  One thing needs to be remembered; the pastor needs to seek out godly business counsel. 
  • A pastor also needs to choose someone who will shoot straight with him.  “Yes men” will get you nowhere.  (Actually they will get you somewhere you don’t want to be!)  Good counsel is sometimes painful, but it is still essential.  A pastor needs someone who will give him the truth, the bad as well as the good. 

Noted theologian Dr. Howard Hendricks describes this type of person as a Barnabas.  “Someone who loves you, but is not impressed with you.”  In short, someone who will shoot straight with you.

With these ingredients, a mentor can help the pastor interpret the financial times of his church.  A mentor will help guide the minister into good decisions and assist the pastor in “doing what is right.” 

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.

The Title "Mentors Matter"1 

[1] Excerpt from, Practical Aspects of Pastoral Theology. Christopher Cone Th.D Ph.D (Editor), Tyndale Seminary Press. You can find the book at Amazon.com

Knowledgable Advice at Your Fingertips!

Jun 21, 10 • ResourcesNo Comments

I was looking at The Church Law Group's website, and once again I'm impressed by the depth of service they offer.  In particular, I like the benefits their member churches receive.

Here at PSK, we have have come up with a similar service.  Churches and ministries can have ready access to our expertise on an ongoing basis: PSK's Optimize Program – POP.  POP membership brings you and your church the assurance that you have our expertise available whenever you need it - at a moment's notice!  Just go to our website and click on the large POP icon.  I think you'll be glad you did!

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The Essential Guide to Church Finances

Jun 7, 10 • ResourcesNo Comments

To accomplish your church’s mission and vision for ministry you need to effectively manage your church’s finances. As we all know, the management of church money is a complex task for any church finance manager, treasurer, business administrator, bookkeeper or pastor. This book will help you strategize, organize, measure, communicate, protect and audit the financials of your ministry.

This guide focuses on five key issues:

  • Planning and Budgeting – How to use strategic planning and an operating budget to reach ministry goals.
  • Minimizing the Risk of Embezzlement – 50 internal control practices for every church and how to implement them to protect valuable ministry resources.
  • Church Financial Reports – How to effectively communicate mission-critical financial information to church leaders.
  • Performance Measurements – How good are you at what you do? Explore various measurements and ratios to help you assess the health of your church and identify the areas that need strengthening.
  • Church Audits – How to avoid, as well as prepare for, external audits conducted by agencies, such as the Internal Revenue Service (IRS) or the Department of Labor, and ways to get the most out of internal church audits.

Each section is supplemented with additional material to help expand your understanding of each topic and provide practical application to the principles that are presented. Whether or not you have professional training in finances, The Essential Guide to Church Finances is the resource you need to help accomplish your church’s mission and vision.

Church Finance Today

Jun 7, 10 • ResourcesNo Comments

Every church needs a strong foundation of current and accurate information for financial planning, tax compliance, and risk management. Failure to stay fully informed in today’s environment can lead to serious problems for both the church and its leaders. No resource responds better to this need than Church Finance Today.
Few attorneys, CPAs, or business administrators specialize in the needs of the church. As a result, it’s hard for church leaders to get authoritative and accurate information. That’s what sets Church Finance Today apart. Church Finance Today focuses exclusively on the needs of the church. Its team of editors include attorneys, CPAs, certified financial planners, risk managers, former IRS officials, administrators, and professors who are leading experts, professionally trained, and fully dedicated to serving the needs of the church.
Richard Hammar, the senior editor of Church Finance Today, is widely considered the leading authority in the United States today regarding church law and tax issues. A graduate of Harvard Law School, he is both an attorney and CPA, and is the author of more than 25 books on legal and tax issues for churches and clergy.
Church Finance Today keeps you informed like never before with timely and practical information . . . written in plain English! You’ll get simple and concise explanations to help you understand and comply with tax reporting obligations. You’ll stay up-to-date on relevant IRS developments, court rulings, and legislation with examples and implications for your church. You’ll find practical assistance in responding to problem areas that often catch church leaders by surprise.
Important reasons why your church should receive Church Finance Today:
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Masters Degree in Church Management!

The University of Dallas just announced a new concentration in its Masters in Pastoral Ministry program – in Church Management!  Now, this isn't a Masters degree in Church Management itself, but a concentration in Church Management in the context of a Masters degree in religion/theology.

Another indication that church denominations are recognizing the need for quality training that combines business expertise with a passion for ministry.  And I think that's great!!

http://www.udallas.edu/.  Just click on the following tabs – Academics; School of Ministry; and Our Graduate Programs

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