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: Blog, Employee Embezzlement, Fraud Prevention, Uncategorized by psk on April 12, 2012 | No Comments

Our church follows written guidelines in administering benevolence fund activity.

Many churches establish benevolence funds to assist needy persons.  This is a normal and expected function of any church.  However, if this activity is not monitored closely the benevolence fund can become a target of a thief.  Benevolence funds are favorite targets for several reasons:

• There is no business cycle making baseline analysis almost impossible
• Checks are written to a variety of individuals and vendors not closely related to the church making it easy to slip one more in the pile
• To protect the confidentiality of recipients, some churches operate separate bank accounts that only one person has the right to see!

35% of our respondents do not follow written guidelines in administering assistance programs. It is extremely important that the Church establish clear policies on its benevolence activities.  Such policies should include but not be limited to what funds will be accepted, who will administer the funds, who will receive the funds and for what purposes the funds will be spent.  Best practices also dictate that a documented beneficiary application and approval process be followed when awarding assistance.

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: Blog, Check Forgery, Employee Embezzlement, Fraud Prevention, Internal Fraud by psk on March 29, 2012 | No Comments

Our church uses pre-numbered purchase orders or check requests.

Theft of cash receipts, particularly offerings, garners the most attention by churches in their fraud prevention practices.  However, the largest dollar-loss incidents tend to occur in the bill paying arena.  In most of the check writing fraud cases I read about I see the same four ingredients which allowed the theft to take place:

Poor segregation of duties

Failure to pay attention to the bank reconciliation process

Poor security over the church’s check stock

Absence of a formal bill approval and payment system

The starting point of a formal bill payment system is the utilization of preprinted (or computer generated) sequential purchase orders or check requests.  The absence of such a system can be the beginning of sorrows for a church…

Approximately 54% of the survey respondents reported not using proper documentation to begin the bill approval process.

Fraud in the Church – What the Survey Tells Us

Posted in: Blog, Check Forgery, Employee Embezzlement, Fraud Prevention, Uncategorized by psk on March 22, 2012 | No Comments

We present a list of authorized check signers to the Leadership Team. (Elders, Finance Committee, etc.)

This is one of the routine questions we ask financial staff when we conduct an audit of a church.  While monitoring check signatures has some merit, it is in my opinion, rather overrated due to the fact that commercial banks no longer review signatures to the same extent they did in the past.  Also, if you are unfortunate enough to hire a thief with courage and great hand writing skills, no amount of signature verification will be sufficient. A person with sufficient bravery and forgery skills can wreak havoc on even the most secure systems.

But, a byproduct of this process can be extremely beneficial.  An annual review of authorized check signers, forces the church to also assess how many and the nature of the bank accounts it has on hand.    If no review is ever performed, it can be easy for a bank account (or two or three…) to unofficially “go inactive”.  These “dormant” accounts can sit under the radar for years until a dishonest employee discovers them.

One of the hurdles a thief has to jump is once funds have been diverted, how to get stolen dollars out of the church.  Dormant accounts are very handy in meeting this challenge.  To illustrate, small amounts can be siphoned out of a church by the payment of phony invoices. The thief allocates these illicit transactions throughout various budget line item accounts being careful to keep the total for the year within budget limits.  Once the funds are safely in the dormant account the thief simply transfers the funds to a personal account…

Our survey results indicated that 41% of the respondents reported they did not conduct an annual evaluation of its bank accounts and signatures.  That is a wide margin of opportunity for would-be thieves.

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?

Fraud in the Church – What the Survey Tells Us

Posted in: Blog, Effects of Church Fraud, Employee Embezzlement, Fraud Prevention, Internal Fraud, Uncategorized by psk on March 8, 2012 | No Comments

Our church has established a formal program for managing fraud risk.

Almost 63% of our respondents reported that they have not conducted a fraud risk assessment or implemented an ongoing fraud prevention program.  Unfortunately, my guess is that the national average is much higher.  It is hard to pinpoint what might be the cause of this rather high percentage but two reasons are prominent:

• The work load of most church business administrators has them stretched to the limit.  There is barely time to get all of the routine tasks completed on a timely basis much less take on additional projects.

• When they do try to implement a program, many CBAs end up as the Lone Ranger.  In many, if not most churches, fraud prevention is a very difficult proposition to sell.  The biggest hurdle? The mistaken belief that “it can never happen here.”

It is not enough to simply be aware of the threat of fraud or go through the motions of fraud prevention.  Ministries that don’t commit themselves to a strong fraud prevention and detection program will likely end up as victims.

A few key ingredients of a formal fraud risk program include:

• Education of church employees, volunteers and members of the risks of fraud.
• Conducting an initial “brain storming” session whose purpose is to identify potential fraud portals.
• Assigning ownership of fraud prevention processes to key church leaders and employees.
• Implementing a periodic review of transactions.
• Periodic review and assessment of the church’s systems.
• Implementation of an anonymous whistleblower hotline. (More about this in a subsequent post)

Fraud in the Church – What the Survey Tells Us

Posted in: Blog, Effects of Church Fraud, Fraud Prevention, Uncategorized by psk on February 29, 2012 | No Comments

The occurrence of occupational fraud within the church community continues to rise at epidemic proportions.  Evidence of this is found in the steady flow of news accounts reporting churches hit with fraud:

• The Archdiocese of New York was bilked to the tune of $1M.
• Incredibly, so was the Archdiocese of Philly.
• A pastor in Grand Rapids Michigan is on the hot seat for stealing between 50K and 100K by using church bank accounts and credit cards.
• A woman in Ohio is accused of stealing $143K from the church where she was employed. (Unbelievably in an attempt to cover up her deeds, she sent an appeal letter asking each member to send $200 to the church to cover a church debt!)

Just in the past year we have been called in to help clients deal with:

• A church employee who refused to be accountable for credit card usage.
• A treasurer who used his position to steal from the church.
• A day care director who skimmed from the tuition receipts.
• A church hit by vendor fraud.
• A church bookkeeper who paid personal expenses with church funds.

In an effort to find out what is going on, PSK in cooperation with the NACBA is in the process of conducting a survey to determine the extent to which churches are attempting to address this problem.  In the following weeks we will be posting some of our preliminary findings.

Chapter 8: Do You Have Any Idea How Much Money You Make?

Posted in: Blog by psk on December 7, 2011 | No Comments

From the book, Weeds in the Garden, in Chapter 8 “When church fraud or embezzlement is mentioned most people immediately think of someone stealing from the offering plates. As a result, many, if not most churches do a pretty good job of protecting the Sunday offerings. In fact, many actually go overboard in tightly ratcheting down the money that comes into the church during worship services and Sunday School classes (pg. 102).

But what about …

• Special event fees (conferences, banquets, etc.)
• Fundraising activities
• Mail in contributions
• School or Mother’s Day-out registration and tuition

How are these funds handled? Who handles them? And is there EVER just one person in control of these funds?  The most effective control on cash is never to allow it in the possession of only one person for even the shortest amount of time.

One story I read about, while researching this topic, involved the ‘treasurer’ of a fund raising event for a church ‘borrowing’ several thousand dollars from the fund.  Strong control over cash from Sunday collections is vital, but who is maintaining this same diligence Monday through Saturday? Maybe a ‘trusted’ employee or volunteer? What challenges do you face with weekday receipts?

–Lisa Chapman is an auditor specializing in church accounting with PSK LLP.