Organizing To Avoid Fraud

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.

Even though these individual efforts, in the proper context, may have some merit, it appears that these churches have simply adopted Yogi’s attitude.  It doesn’t really matter what you do or which direction you are going, just as long as you are making good time.  These fearful churches are making so much progress implementing their new controls, they may not realize that these new protective measures are not getting them where they want to go. Without laying a proper foundation for fraud prevention, these steps may do little more than make them feel better about their situation.  In other words, they have nothing more to show for all of their efforts than a security blanket.

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…

The first characteristic has to do with attitude.  In my opinion, attitude is by far the most important element to effective fraud prevention.  The reason is simple:  if the willingness to have a fraud-free environment is absent, absolutely no controls will be effective.

In addition to being the most important, in many cases this characteristic is the most difficult challenge to overcome because of prevailing attitudes in many congregations. First, most churches adopt a “trust and forgive” attitude rather than “trust, but verify”.  They tend to overly trust because, “we are all friends here”. Additionally, in the event fraud does occur, they are very quick to forgive.  An unfortunate corollary to this attitude is that crooks are aware of this mindset.  That’s why they often target churches.  Churches must educate their staff, members and volunteers that the “trust and forgive” philosophy must give way to “trust, but verify”.  Part of this process is to convince them that accountability not only protects the church bank accounts, it protects those serving the church as well.

The second prevailing attitude is: “It can’t happen here.”  Part of fraud awareness education is to lead the congregation to understand a difficult truth: “Yes, it can happen here.”  In fact, it can happen anywhere.  We have to remember that before he was a betrayer, Judas Iscariot was an embezzler.

A term frequently used to describe the desired attitude is “Tone at the Top”.  The phrase gets its name from the direction from which the proper attitude should come from – senior leadership.  Setting the proper tone at the top is the job of each church’s leadership, meaning the senior level employees (Pastor, Executive Pastor, etc.) and the leadership team (Board of elders, directors, deacons, finance committee etc.).  Every individual serving a church at this level has several responsibilities:

  • Communicating the need for accountability and what acceptable values are.
  • Setting a good example for others to follow by living by the rules themselves.
  • Making a commitment to openness and transparency by participating in accountability measures, such as signing a conflict of interest policy.

Staff buy-in…

If the senior level employees of the church are not committed to “doing things right”, no amount of fraud prevention measures will provide protection.  Policies and procedures to aid in fraud protection may be in place, but odds are strong they will not be obeyed.  That is why it is crucial to have “buy-in” by executive and management level church employees.  The church’s leadership, as the word implies, has the responsibility to take the lead in communicating acceptable values to other staff, to set a proper example, and to encourage subordinates to “do the right thing.”

And they can’t just talk a good game; they must back their words up with actions.  One simple example is expense reports.  In spite of the fact that filling out expense reports can be a nuisance and takes time out of their busy schedules, the senior staff has to come to understand their necessity.  Willfully complying without complaining, is a great example of reinforcing the proper tone at the top.  You can rest assured that sarcastic remarks by a senior employee about having to mess with expense reports will reverberate throughout the entire church.  Negatively!

An empowered leadership team…

Many of the more spectacular financial scandals in recent years have one thing in common.  They involve ministries or churches “ruled” by a single individual accountable to no one but himself.  With no checks and balances and vast amounts of cash, most of us would find it difficult to resist temptation.  As in all areas of life, we need help in staying accountable.  We can’t do it alone.  Scripture backs this up too – See Ecclesiastes 4:9-12. That is why a strong, empowered leadership team is crucial to effective fraud prevention.

The leadership team cannot be a figurehead and should include, at a minimum, some of the following characteristics:

  • It must be formally established by the church through its articles of incorporation, by-laws, constitution or other governing documents.
  • The leadership must have authority to make difficult decisions, not serve simply to rubber stamp others’ decisions.
  • It also must be given permission and encouraged to ask “difficult” or “uncomfortable” questions.
  • It must be an ongoing team; temporary task forces seldom accomplish much.

These factors will help establish the tone of the organization and take a large step forward in warding off financial predators.  But, and this is important, the leadership team must be constantly reminded that they serve a church. (Emphasis on serve.)  Churches don’t need overseers.  They need servants.

Competent volunteers…

Without question, the church is the greatest volunteer organization in the history of the world.  From its very beginning, the church has been dependent on people who take no pay, earning their living in the market place instead.  But, in spite of this wonderful tradition, volunteers tend to be taken for granted in two ways.

First, churches seldom express proper appreciation to their volunteers for the countless hours of dedicated service they provide.  Looking at it in simple financial terms, could you imagine how much it would cost if the church had to pay for the volunteers who feed the hungry, visit the sick and lonely, teach Sunday School and, yes, count the Sunday offerings?

A second way volunteers are taken for granted happens when churches pay too little attention to how volunteers carry out their duties.  Volunteers tend to be engaged on a “turn-key” basis, meaning they are asked to get certain things accomplished but given no real guidance on how to get the job done.  As a result, sometimes the wrong person may end up in the wrong place doing the wrong things.  Two areas where this has caused churches immense pain are taking care of the church’s children, and taking care of the church’s money.

Here are a few steps churches should take to improve and protect their volunteer force:

  • First, screen potential volunteers; it is always possible that an individual’s motives for stepping up to volunteer may not be so noble.
  • Provide formal training and orientation to increase volunteers’ efficiency and reinforce the church’s commitment to doing the right thing.
  • Take steps to insure that the church’s volunteers remain effective; continuing education is just as important for volunteers as it is for a church’s professional staff.

As tempting as it may be to jump into action, it is much more important to take the time to put a strong foundation in place to prevent fraud. Because what’s more important; the time you are making, or the direction you are heading?  Make sure your church never has to make a u-turn.

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 verne@pskcpa.com

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