Five Ways to Fight Fraud in Your Church or Ministry Organization By Mark Helland, CPA

Five Ways to Fight Fraud in Your Church or Ministry Organization
By Mark Helland, CPA

Mark Helland, CPA is a partner with the accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. For further information on this topic, Mark’s firm has a short report on basic fraud prevention tactics which is available to you at no cost. Mark can be contacted via email at mark@edandhcpa.com or by phone at (918) 627-2286.

“A church should be run like a business.” In my nearly twenty years of performing audits and reviews of churches and ministries, if I had a nickel for every time I have heard that comment I could be residing on a tropical island somewhere! From my experience, the comment has a kernel of truth to it in some respects, but as we all know it is not accurate in many other respects. However, there is one area where church and ministry organizations should be run like business organizations and that is in the area of internal controls over financial reporting.

Maintaining strong and effective internal controls is critical for all organizations, regardless of for-profit or non-profit status and regardless of size. Unfortunately, financial fraud (i.e. embezzlement, misappropriation of funds, etc.) is a fairly common crime in America and religious organizations are certainly not immune from the occurrence of this crime. There are many reasons for the continued growth of financial fraud. Fraud typically initially takes place due to extreme financial stress on an employee’s life as a result of certain life events (i.e. high amounts of debt, divorce, addictions such as gambling, etc.). However, from my experience the major reason why financial fraud continues to grow is that the perpetrators, even if caught red-handed, are rarely prosecuted. I have personally worked with many organizations who have been victimized by dishonest accounting employees and I have seen only one situation where the employer was actually able to get local law enforcement to vigorously prosecute the offender. In many cases, local law enforcement has “bigger fish to fry” and either requires an impossible amount of documentation of the theft or is simply not interested. The end result usually is that the fraudster is not prosecuted, is not bound to make any form of reparation to the organization and the record of the fraudster in effect remains clean. This invariably allows the fraudster to move on to the next organization to do the same thing again and in many cases, it has emboldened them to commit even greater acts as they feel as if they are bullet proof.

A strong internal control structure has many components, but following are some very effective, low-cost ways that you can strengthen internal controls and keep your organization safe from fraud:

1. Control access to bank statements.

Never allow an individual who has direct access to bank accounts (i.e. access to blank check stock, check signing authorization, reconciling the bank statement, etc.) to initially receive and open the monthly bank statement(s). This is one of the easiest ways for fraud to go undiscovered as the images of checks that were unauthorized or forged are initially being received by the person that committed the act. Even if the bank statement were to be subsequently reviewed by someone else, the individual who received the bank statement could have removed or altered certain check images or data to hide transactions.

The good news is that there is a very easy solution to this problem. Simply change the mailing address on all bank statements to the address of a trusted individual such as a senior pastor, administrative pastor or better yet, a board member or deacon. The key factor here, is the individual that you choose should be someone who does not have any access to the organization’s bank accounts – in effect, the individual should be a neutral third party who is “auditing” the monthly bank statements for irregularities. The designated individual should then look for irregularities such as checks made payable to unusual or unapproved vendors, unauthorized check signors, forged signatures of authorized signors, payroll checks to unknown employees, payroll checks to employees for the wrong amounts, etc. If you can only implement one step from this article, implementing this step will greatly enhance your organization’s internal controls.

2. Require dual signatures on checks for larger dollar amounts.

Ideally, all checks would have dual signatures by authorized check signors, but this is just not realistic in a fast-moving, dynamic church or ministry environment. A more realistic policy is to require that any check over a certain amount, for example $1,000, be signed by two people. Ideally, the two authorized signors of “large” checks should be the individual in charge of finance and accounting and a board member. Furthermore, the board member chosen to co-sign large checks should not be the same board member selected to review bank statements as listed in the previous point. I recognize that this is a bit cumbersome and may require a degree of coordination, but that is kind of the point. Large checks should require a greater degree of thought and consideration before they go out the door.

3. Restricted funds need extra tracking and caution.

One of my biggest “pet peeves” as an auditor is when restricted funds are co-mingled with unrestricted funds. Donations that have been designated for a restricted purpose by the donor should never be deposited into a bank account with unrestricted funds. If your church or ministry receives restricted donations, a separate bank account should be maintained specifically for these funds. These donations can then be tracked and payments can be made directly out of this account for the restricted purpose(s). Depositing restricted funds in an account with unrestricted is dangerous as it is far too easy to “forget” that these funds were restricted by the donor for a certain purpose.

4. Make sure that payroll taxes are being paid.

The most critical payment that your organization can make on a monthly basis is the payment of payroll taxes to the Internal Revenue Service (IRS) and state and local tax authorities. If you want to get in trouble quickly, failing to make a payroll tax deposit or failing to make such payments timely is the best way to do it. The penalties for any mistakes in this area are enormous and the IRS is becoming much less forgiving of errors in this area. This is also an area where the fraudsters that I mentioned earlier love to operate. Rather than remitting the payroll taxes to the tax authorities, a frequent fraud is to instead remit these amounts to a shell company or organization that they have formed. The check made payable to “IRS” which they provided to you for signature can easily be changed to FIRST ROOFING, LLC or FIRST FEDERAL BANK, etc. Your best bet here, especially if your organization is small, is to outsource your payroll to a third party provider such as Paychex , ADP or a local CPA firm where you can be sure that the payroll is being done correctly and that all deposits are being made. The cost for this type of service is minimal as compared to the payroll costs of keeping an employee on staff. If you do decide to have your payroll done in house, again make sure that someone is “auditing” the payroll function to make sure that all payroll tax deposits are being remitted correctly and timely.

5. Place a priority on the accounting and finance function.

From my experience in working with churches and ministries, many seem to greatly underestimate the importance of the accounting and finance function. It is a widespread practice for accounting and finance employees in churches and ministries to be paid far below the “market” rate for their skills. Further, in is not uncommon for churches to require that all employees also be church members. I have no problem with this requirement per se, but this requirement combined with below market compensation greatly diminishes the pool of qualified, desirable candidates. Accounting is a complex area and while anyone can call themselves an accountant or bookkeeper, very few truly understand the intricacies of balance sheets, income statements and statements of cash flows. Consider increasing compensation levels for key accounting and finance employees and I am confident that your church or ministry will have much better, more qualified candidates from which to select.

 

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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