Fraud in the Church – What the Survey Tells Us

Posted in: Asset Misappropriations, Blog, Effects of Church Fraud, Employee Embezzlement, Fraud Prevention by psk on April 26, 2012 | No Comments

Our church has established an “approved vendor list”.  All payments for goods or services are made only to vendors on the list.

A surprisingly high percentage (82%) of our respondents has not established an “approved vendor list”.  A common misconception in the church environment is that “If we are going to be hit, it will be directed towards our tithes and offerings.”  While this does happen frequently, some of the largest dollar losses occur in the disbursement processes, not the receipts.  Also, these types of frauds, because of their difficulty of detection, seem to go on for longer periods of time than thefts of cash receipts.  From my observations, it seems that many more churches are hit after their revenues are safely in the church’s bank accounts, not on their way in.

The first line of defense against disbursement fraud is the development of well-defined AND written bill approval and payment policies and processes.  In addition to purchase orders and check requests, such a system should include a formal vendor selection and retention process. After successfully screening potential donors, the church should develop a preferred vendor list. As part of the check signing process, payees should be compared to the approved vendor list.

Fraud in the Church – What the Survey Tells Us

Posted in: Asset Misappropriations, Blog, Effects of Church Fraud, Employee Embezzlement, Fraud Prevention, Internal Fraud, Uncategorized by psk on April 19, 2012 | No Comments

Our church reconciles payroll quarterly reports with the payroll journals and general ledger.

Almost 25% of our respondents do not perform this relatively simple task. I can show you plenty of news reports of churches who wish they had!  Occasionally, I need to point out the obvious; thieves do not like to get caught!  To remain successful at this, they have to hide in the tall weeds. This means they are going to target the big numbers in a church’s financial statements.  And the biggest of the big numbers is payroll cost.

Typically, payroll makes up 50% of a church’s operating budget. For example, if a church has a one million dollar budget, a thief can easily find cover among $500K of tall weeds!

To avoid being the victim, churches should take care to:

• Know who their employees are
• Know how much their employees are paid
• Periodically review activity in the payroll general ledger accounts
• Compare payroll reports with budget totals

Fraud in the Church – What the Survey Tells Us

Posted in: Asset Misappropriations, Blog, Fraud Prevention by psk on April 5, 2012 | No Comments

Our church requires volunteers responsible for special events to submit written financial reports.

The vast majority of churches have implemented adequate control procedures over the Sunday offerings.  However, funds that arrive in the church office from Monday through Saturday are a completely different story.  These types of revenues typically consist of offerings dropped off by members, fees for various events and food service revenues and special event revenues under the direct supervision of volunteers, such as fundraisers, banquets, and short-term mission trips.

According to our survey, a full third of the respondents have no reporting mechanism of these types of events. Theft of special events funds by trusted volunteers frequently pop up in the news media.  For example, in the city where I live, a prominent public school coach was relieved of his duties when it was learned that he was in the regular habit of skimming from the receipts his team’s annual fund raiser.   To avoid the headlines, churches at a minimum should require volunteers to account for tickets and/or products sold and fees collected at each special event.  As a matter of routine the sales report should be reconciled with the total cash generated and deposited into the church bank account.

Fraud in the Church – What the Survey Tells Us

Posted in: Asset Misappropriations, Blog, Employee Embezzlement, Fraud Prevention, Internal Fraud, Uncategorized by psk on March 15, 2012 | No Comments

Our church has established a formal program for reporting fraudulent activities.

In its 2010 Report to the Nations, the Association of Certified Fraud Examiners revealed that 40% of fraud cases were initially detected by anonymous tips. Half of the tips came from employees.  Approximately two-thirds of these cases were communicated through the entity’s fraud hotline.  This data is not inconsistent with prior years’ findings.  In fact, during one year a whopping 60% of detected fraud was discovered by the combination of tips and/or by accident!  In our survey, we learned that 59% of the churches responded reported having no mechanism for employees, members, and vendors to report suspected improper behavior.

The use of anonymous hotlines, usually found on an entity’s website, has been quite successful in the corporate and government environments.  However, this is a tough sell in the church environment as it seems distasteful to most people involved in church.  And that includes me…

I have been (and remain) reluctant to recommend to my church clients taking such a step.

However, one solution I have seen, that may be a good middle-ground is to outsource this function.  There are third parties who provide this service by making available a toll-free phone line and a web address.  Because confidentiality is crucial, all reports go directly to the third party and bypass any nosy people along the way.  As part of the church’s whistle-blowers policy (which I hope your church has) a description of the third party providing these services and the processes to be followed should be included in the church personnel manual.

What do you think about this idea?

Cash – 3 Musts for Your Ministry

Posted in: 3 Musts For Your Ministry, Asset Misappropriations, Blog, Employee Embezzlement, Fraud Prevention, Internal Fraud, Resources by psk on April 20, 2011 | No Comments

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.

Posting a Guard over Fixed Assets

Posted in: Asset Misappropriations, Blog, Effects of Church Fraud by psk on January 24, 2011 | No Comments

I don’t mean this literally of course.  Few churches have the resources to have full time security guards.  But, churches need to do more than they currently do.  Because churches “obsess” over watching over their bank accounts, they have very little time left to watch over their “stuff”.  That’s why I can safely say that every church with non-cash assets will testify that if you don’t watch your fixed assets, they may just “walk off”.

I am also fairly certain that this inattention is very costly. Most churches would be shocked if they totaled up their annual replacement costs for computers, televisions, recorders and sound equipment.  It would also be interesting to know how much of the purchases were to replace items stolen or “misplaced”.  Churches would save money in the long-run if they practiced as much stewardship over “stuff” as they do over cash.

The starting point in gaining control over fixed assets is to maintain better records of fixed assets; what is owned, when it was purchased, how much it cost, and where it is supposed to be located.  The list should be referred to often, re-evaluated each year and adjusted for disposals and additions.

Periodically a physical inventory should be taken, if for no other reason, to establish insurance values in the case of fire or natural disaster.  This does not have to be a complex process and simpler really is better.  A video inventory would be more than sufficient.

Finally, some assets need special consideration.  These are assets that the IRS is most concerned with and are also most appealing to thieves; assets that can easily be used for personal purposes.  Cars, trucks, computers, and video and recording equipment are the most popular types.  Churches would be wise to establish a few policies to monitor the use of these assets.

A Well Defined Purchase Approval and Payment System

Posted in: Asset Misappropriations, Blog, Check Forgery, Check Fraud, Check Tampering, Construction Fraud, Expense Reimbursement Scheme, Fraud Prevention, Internal Fraud by psk on January 10, 2011 | No Comments

There is a great difference in attitude in the church environment between receipts and disbursements.  While churches exercise extreme vigilance over the “inflow” of funds into the church, many have a rather cavalier attitude towards the “outflow”.

Churches also tend to rely on a few “fraud prevention” methods which in my opinion provide little more protection than a security blanket.  They may give a warm and fuzzy feeling, but are no help in a real crisis.  The two I hear most often are the requirement of dual signatures for checks over a predetermined amount and the requirement that a check request form be filled out before anyone gets paid.  It is not uncommon for these to be the only two “fraud prevention” controls exercised over cash disbursements.  Churches that rely on methods this simple are unaware of two basic facts.

• First, dual signatures and homemade check requests are absolutely no match for an ethically challenged employee with the courage to forge. 
• Second, and this may be the most surprising, many of the larger and more spectacular embezzlements involve tampering with the church’s cash outflow, not the inflow.

Key: While no system is foolproof (especially if collusion is involved) the best fraud prevention practice in regard to disbursements, is to segregate the bill paying tasks between as many people as possible.  Some of the more important tasks to distribute are:

• Payment approval
• Receiving of goods
• Check preparation
• Check signing
• Bill mailing
• General ledger maintenance

Unfortunately, very few churches have enough employees to split all of these tasks up.  So what can be done?

Just as with cash receipts, a good place to start is by holding another brain-storming session in which the church’s procurement processes are analyzed.  Flow-charting is a very useful tool in this exercise.  Then, to the best of the church’s capabilities, the tasks should be distributed among several employees and volunteers.  But even after this process, most churches will have more tasks than people to give them to. 

But, there are other steps that can be taken.  Although they take place after-the-fact, these practices still provide strong measures of fraud prevention. 

• First, someone outside the business office could be assigned the task of reconciling the bank account monthly.  This could be another employee, the business administrator, or a competent volunteer.  The reconciliation should not solely be a “balancing” of the checkbook but should also include a close inspection of the cancelled checks for endorsements and signatures and an analysis of outstanding items.  Online banking and remote access has made this practice even more efficient and practical, as volunteers do not have to come to the church office to do the work. 
• Another step is to perform an analysis of the church’s check register by exporting it to an electronic spreadsheet and sorting by vendor.  It is surprising how quickly check writing “anomalies” can be detected using this procedure.  This practice should also be performed periodically.

Although not foolproof or guaranteed to catch everything, these two practices serve a bigger purpose.  Key: They are loud and clear advertising to any and all, that someone is looking.  This will force a potential thief to at least stop and ask himself; “Do I feel lucky today?”

Awareness of ALL Sources of Revenue

Posted in: Asset Misappropriations, Blog, Contributions and Offerings Fraud, Effects of Church Fraud, Employee Embezzlement, Fraud Prevention, Internal Fraud, Uncategorized by psk on January 3, 2011 | No Comments

Any discussion of church tithes and offerings practices usually includes both a pat on the back and a criticism.  First, in regard to the normal Sunday offerings I can say to most churches, “Way to go!”  In fact, when I ask a client if they have taken any fraud prevention steps, the first thing usually mentioned is how much the church has done to protect the offering plate.  Seldom do I encounter a church that does not have multi-member count teams, rotating terms of service, locking bank bags, dual-access safes and in an increasing number, the use of an armored car service.  I would venture an educated guess that the majority of churches have more than adequate controls over Sunday receipts.  For some, Fort Knox would be an easier target.

But in regard to the rest of the money, the funds that come in during the rest of the week, I often have to say, “What were you thinking?”  While being diligent to a fault on Sunday morning, almost anything and everything goes the rest of the week.  Here are two in my hall of fame:

• Offerings, fees and other receipts arriving in the mail or dropped off by members are simply dumped on the financial secretary’s desk.  I have entered offices with large piles of unguarded cash on the accountant’s desk more times than I can remember.
• Special events funds sometimes are “managed” by a volunteer.  The funds are kept off campus and are not turned over to the business office until the event is over.  No accounting or reconciliation of goods sold is required.

Needless to say, some of our more interesting and sometimes humorous fraud stories occur in these two areas.

However, this is no laughing matter, because a significant “event” could cause irreparable damage.  That being the case, definite steps should be taken.

• First, a brainstorming session could be held, the purpose of which is to determine all sources of income. 
• Once identified, all sources should be included in the church’s normal collection policies and procedures. For example,
  • For weekday drop-offs and mail-ins, a lock box could be kept in the church’s safe in which all of these receipts would be placed unopened. 
  • A separate log or register should be maintained to keep a record that the amounts were received. 
  • On Sunday, the box could then be opened and counted by the teller team on duty.

Security Blanket #5 – We Set Up Separate Bank Accounts for Special Funds

Posted in: Asset Misappropriations, Dormant Accounts, Endowment funds, Fraud Prevention, Internal Fraud by psk on October 18, 2010 | No Comments

“We set up a separate bank account for each special fund to make sure the money goes where it is supposed to go…”

Over the years, we have seen many churches take this approach.  Rather than using their church accounting software to take care of measuring and tracking the restricted funds, they either open separate bank accounts or worse, divide one bank account among several different general ledger accounts.  I have detected two main reasons some churches take this approach:

1 – They have been burned in the past by funds designated for a specific purpose being spent for something completely different.  When it came time to accomplish the designated purpose, funds were no longer available to accomplish the task. 

2 – They simply don’t trust themselves.  The temptation to redirect the funds is too great.  So, the thinking goes, “we will set up a separate account to keep these dollars safe”. 

Churches who choose this path seldom realize that by closing one door, they inadvertently open up a much more sinister portal:  they create an environment for a con artist to conduct a very expensive shell game.  With multiple bank accounts and limited controls, an embezzler can shuffle funds among the accounts to create a dense smokescreen, making detection extremely difficult. 

The best practice?  Have as few bank accounts as possible coupled with strong internal controls and recordkeeping.

Interested in finding out how your controls measure up?  Contact us today about our internal control assessment and other Best Practice Engagements at (817)664-3000 or email us using our contact form.