Trap #7 Failing to develop a Fraud Prevention Program

Jul 13, 12 • NewsNo Comments

When discussing fraud, churches continue to believe in the myth that “it can’t happen here”. In their annual report to the nations, the Association of Certified Fraud Examiners released statistics that debunk this myth.  According to the ACFE, more than 14% of reported fraud cases involved nonprofit organizations with churches and religious groups accounting for almost a third of these cases.

There are two facts that need to be pointed out about fraud in the church. 

  •  First, as the statistics illustrate, it can happen here.  And the Bible, in John 12:6, tells us that this behavior has been going on for a long, long time.
  • One of the reasons that churches hang on to this myth is that they do not have a sufficient understanding of what fraud examiners call the “Fraud Triangle”.  The Fraud Triangle consists of the three elements normally present to create an environment conducive to conduct fraud.

The first leg of the triangle is – PRESSURE

Although it does happen, the normal pattern for economic abuse of a church is not that of a “crook” seeking out a vulnerable church.  The most frequent situation involves a trusted long-term church employee or volunteer.  Usually these individuals are facing some type of pressure that makes them consider taking things that are not theirs to take.  Examples are unexpected medical costs, business reversals of a spouse and more and more frequently, addictions.

The second leg of the triangle is – RATIONALIZATION

Rationalization is the “self-talk” a potential thief engages within his mind that convinces him that what he is doing is ok.  The most frequent rationalization is, “I’m not stealing.  I am borrowing.  I’m going to pay it all back.”  Unfortunately (for the thief) unauthorized borrowing will get you in just as much trouble with the law as actual stealing.

What these first two legs tell me is this; it is often not BAD people who steal from church, but rather good people who find themselves in difficult circumstances.  Another thing these first two legs tell me is that the church has little control over them. 

However, the church has total control over the last leg –OPPORTUNITY

Opportunity refers to the presence of weaknesses in the church’s management, accounting and cash control systems. If little thought is given to the strength (or weakness) of your church’s business operations, the church is creating a significant OPPORTUNITY for a fraud event to take place.  In other words, by ignoring this vital area, you may be adding the final ingredient to a “perfect storm” of financial calamity.

A fraud assessment and prevention program is a must. 

Planning tip – It is really not that difficult to at least get started.  One idea is to have a brain storming session for a couple of hours with key staff and volunteers.  During this session a simple flow chart of the church’s various cash flows could be developed.  From this simple process you might be surprised how many loopholes in your system exist…

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