The severity of a fraud incident is usually measured in one way – How much money was lost? When presenting fraud case studies to church groups I have noticed a common reaction: the larger the dollar loss, the louder the gasps from the audience. While it cannot be denied that in some cases the economic impact of embezzlement can cripple, or in some cases, result in the death of a congregation, the dollar loss is often the least of the church’s problems.
In the church environment, the real cost of economic fraud has little to do with lost funds. In fact, most churches can replace stolen money with insurance claims. (Or perhaps a great sermon series!) The real cost of an incident comes in the aftermath, when the church body learns they have been betrayed. Loss of trust can, and often does, outweigh the dollars lost to an embezzler.
Financial “bad behavior” is becoming rampant in the church. You would have to be living in a cave to not recognize this. There is not a week that goes by without another headline appearing that tells the sad story of a “trusted” church employee “gone bad”.
The good part of this, if there is a good part, is that the news is getting to be so nerve-wracking that churches and church administrators are finally beginning to recognize that a problem exists. The two most common questions suddenly being asked are, “What can we do?” and “Where do we start”? Unfortunately, financial misbehavior in the church is very pervasive and the variety of methods of abuse seemingly unlimited, causing answers to these questions to be quite elusive to the average church administrator.
As the story goes, New York Yankee stars Phil Rizzuto and Yogi Berra were on their way to a function in Cooperstown, New York when Rizzuto commented that he thought they were lost. Yogi’s reply? “Yeah, but we’re making great time!”
This story reminds me of the way some churches approach fraud prevention. There has been a recent proliferation of church embezzlement cases hitting the newspapers and many church administrators are reacting in fear. Often, this fear causes them to do something similar to Phil and Yogi. They head out quickly in the wrong direction, never slowing down to see if what they are doing is having any effect. From their typical casual and relaxed approach to business affairs, many churches rashly set out on a crash program of fraud prevention. Without much thought or planning, they begin to tighten things up by suddenly requiring dual signatures for all checks, beefing up offering count teams, and requiring purchase orders to be prepared in triplicate for all expenditures, no matter the size. Other churches even install security cameras, hire armored car services, or have off-duty police walk the halls of the church during services.
What do you think of when you hear names like Enron, WorldCom, and Sarbanes-Oxley? Most of us think of one word: fraud. These two companies who were embroiled in fraudulent scandal and the law passed to “fix the problem” have brought to light the impact fraud has on today’s society. No one knows for sure the economic loss to fraud in our culture due primarily to the fact that most fraud goes undetected or if detected unreported. However, some estimates have ranged as high as $600 billion in annual losses.
Unfortunately, churches are not immune to this threat. And even more tragically, most churches pay little attention to the exposure. Most church staff members are under a heavy work load and there is little if any time to stop and take stock of how vulnerable the church may be to improper activities. Add to the fact that many churches operate under the mistaken assumption that since they work for a church and “we are all good people here”, they don’t really need to worry about anyone doing anything wrong. They forget one basic fact: churches are in the business of healing sick people (Behaviorally sick as well as physically). It should come as no surprise that a church will attract sick people including some who end up in a position of trust.
The first step in fraud prevention is knowing what you are coming up against. In other words, a clear understanding must be gained of what financial fraud is before designing a battle plan to confront it.
The Association of Certified Fraud Examiners (ACFE) defines occupational fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Because of the heavy reliance of churches on volunteers, this definition should be expanded to include unpaid staff in addition to employees. According to the ACFE, there are three major types of occupational fraud:
- Fraudulent financial reporting
- Misappropriation of assets.
Effective fraud prevention starts with a strong foundation. And the cornerstone of this foundation is organization. Churches “lucky” enough to have avoided fraud are not really lucky at all. Luck had nothing to do with it. These churches avoid fraud because they make sure their organizational structure includes four key characteristics:
- Proper tone at the top
- An empowered leadership team
- Staff buy-in
- Competent volunteers
PSK LLP has provided this article as a resource to help churches prevent fraud.
We can help you with your specific needs by calling us at 817.664-3000 (Toll Free: 800.424.5790)
or email Verne at email@example.com
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Our clients keep us on our toes! Because we encourage them to call us when they have a problem and we generally don’t charge for phone calls, we get a steady stream of questions posed to us by our clients and friends.
Most of the questions are quite routine, dealing with things common to all churches: whether or not a particular employee qualifies for a housing allowance or if a designated gift should be treated as a deductible contribution. But occasionally something new comes along.
PSK hosts a monthly breakfast for church business administrators where in addition to a delicious meal the attendees are treated to a discussion of a topic relevant to church business administration. In May our breakfast was billed, “Know Before You Go” and we discussed things that must be considered when planning a short term mission trip. For example what do you do if a member asks for contribution credit for paying for a specific individual to go on the trip? We also covered trip organization (passports, visas, shots etc.), paymaster responsibility and record keeping and insurance.
But, something I was asked recently made me aware we had left something out. “We are sending money to a mission group in Africa. Can we get in trouble with Homeland Security?” Turns out they and other churches funding ministries like schools, hospitals and orphanages, should be concerned.
Now, I don’t want you to get overly concerned. The reality is that it is unlikely that a church will have its assets frozen or exempt status threatened by funding an orphanage. Provided, of course, it takes minimum precautions. Here’s just a few:
- First become familiar with Executive Order 13224 and The USA Patriot Act the legislation requiring that certain things be done. Helpful resources are The US Treasury’s Anti-terrorist guidelines and The Principles of International Charity.
- Educate your church, both staff and laity, of the implications of the anti-terrorist rules.
- Do background checks on the groups you are helping, particularly referring to several government lists that identify terrorists.
- Keep good records of all of your activities and insist on accountability.
There you go; something new to worry about over your Christmas holidays. If you have any questions, don’t hesitate to call!