Developing A Fraud Risk Assessment

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.

Over the last few years our firm has recommended in our management letters given to each audit client that they develop a fraud prevention program.  The first question usually asked is, “But, where in the world do we start?”  Our answer is short.  Have a brain storming session.

We recommend that the meeting be informal, with a small number of participants including staff and laity.  Don’t start out with an agenda to stamp out fraud.  Just plan to discuss and hopefully identify points where the church may be subject to harm.  One way to visualize this is to compare the church’s cash flow to a pipeline that flows into and out of the church.  What the brainstorming group should hope to find and eliminate are any “faucets” that can be opened by a single individual.

Here are a few questions and ideas grouped in five major categories that we recommend our clients address as they conduct a fraud brainstorming session

  • How’s the tone at the top? Are the executive level employees on board with this?  How about the significant lay leaders?  Has the church adopted a written conflict of interest policy?  Has it been communicated effectively throughout the church?  If the answer to these questions is no, your brainstorming session doesn’t need to last long.  Without support at the top none of the remaining questions will really matter.
  • Do you have a good understanding of the church’s “inflow” pipeline – cash receipts? Is the offering in the custody of a least two people from collection to delivery to the count room?  Is your teller team made up of volunteers?  Do you conduct background checks?  Do you require team members to rotate off the count team occasionally?
  • How about your outflow pipeline – cash disbursements? Do you have an exceptionally talented bookkeeper?  One who is able to write checks, sign checks, mail checks, record checks in the general ledger, reconcile bank accounts, and produce financial reports?   If you do, have you “dumped” all of this work on this person? Does the church have a formal disbursement approval system? Does anyone outside of the business office ever review the cash disbursements or do you simply rely on the budget reports?  Without paying attention to these questions many churches, even though not suffering currently because their present staff is trustworthy, are sitting ducks.  One day a transition will occur.  The question they have to ask themselves is, are they willing to extend this trust to someone they don’t even know yet?
  • How about your underground pipelines? While the vast majority of a church’s revenues arrive during a three hour period every Sunday morning, there are many smaller pipelines that most church members don’t even know exist.  Weekday drop-offs of tithes is one example.  Do they follow a receipting/recording process or do they simply find their way to the bookkeeper’s desk?  Many churches also run auxiliary operations such as day care, after school and recreational programs.  Does the church know what kind of billing / collecting system if any that is being used?  Are all “customers” being billed?  Are there any uncollectible accounts?  And probably the biggest headache of all, special events such as banquets and fundraisers.  Who has the money?  Is anyone keeping record of sales?
  • How about the people working along the pipeline? Because, in business terms, a church is in the service industry its largest cash outflow is personnel costs.  Payroll costs, including benefits, can range from a low of 40% of budget to 55% and higher depending on staff demographics.  That is why having a handle on your payroll procedures is so important.  There is a lot of territory in this area for mistakes and even worse, fraud.  It is important that the church knows how many people it employs and who they are.  Questions to ask are:  Are employee files being maintained?  Are they up-to-date and do they include the appropriate documents such as forms W-4 and I-9?  How does the church track hours worked for hourly personnel.  Are paychecks ever distributed occasionally to employees by someone other than immediate supervisors?

When we say conduct a brainstorming session we really mean sessions.  To do it right the church will need to conduct several such sessions.  But, once accomplished the church will be well on its way towards developing a wall of protection, not just for its cash, but most importantly for its greatest asset – its people.  One of the byproducts of this process will be the segregation of the duties which will protect church staff and volunteers from unwarranted charges of impropriety.  It is important to emphasize that in volunteer organizations, the appearance of improprieties can cause as much or more harm than actual occurrences of theft or embezzlement.

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)
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