Part 2 of our series on Cash Disbursements. In our recent Fraud Survey, we asked churches to respond to this statement:
“Our church uses pre-printed, pre-numbered purchase orders or check request forms to initiate purchases.”
Survey results – The positive response to this question was extremely low, causing me to believe that the question was poorly worded. It should have included the use of electronic purchase orders generated by most church management software.
Not being able to rely on the survey results, however, does not keep me from sharing the main point.
KEY: A documented approval and bill payment process is a must!
Keep in mind one of our previous posts: Fraudsters Hate Baselines. A well documented bill paying system forms a part of the baseline.
Our Fraud Awareness in the Church series continues with a 5-part series on Cash Disbursements.
When churches finally get around to considering their exposure to fraud, they almost universally focus on the cash receipts or the inflow part of their cash processes. Without doubt, many churches have been hit by fraudsters skimming from the offering plates. But in most cases, the losses are relatively small for two reasons:
- Most churches have strong count team processes, although more of them should add some rotation to their teller mix.
- The vast majority of offerings come in the form of checks or credit cards. Very little is cash.
KEY: The fact is, the biggest scams usually occur on the “outflow stream” not the inflow…
In the next series of posts we will see how well protected our church survey participants are on this side of the ledger.
Part 7 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“Our church requires volunteers to collect, administer and account for special event receipts using a written report developed to properly account for such events.”
Survey Results – Once again, a little over one-half of our respondents are in compliance with this fraud prevention measure.
KEY: Many churches farm out the reporting of special event accounting and require little or no accountability from their volunteers.
A significant example of this took place in our region a few years ago. It took place within our local school district, but the same thing can and has happened at churches. A sports booster club held two annual fundraisers. Some agitated parents (whose children evidently didn’t make the team…) discovered or were tipped off to the fact that checks received during the event were deposited in the club bank account. However, cash received was deposited in the coach’s personal account. The parents didn’t report it to the school district first – they turned him into the newspapers!
Part 6 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“We present a list of authorized check signers to the leadership team/elders, etc. for review at least annually.”
Survey results – Approximately 55% of respondents reported reviewing their bank accounts and related signature information at least annually.
Dormant Bank Accounts
I would imagine if we had sent a question asking if they knew why this annual review was important the result would probably be close to zero! This question was lifted right out of our firm’s audit procedures. We ask this question each year and are often asked why this is important.
Here are two good reasons:
Poor management of check signing authority can result in a once-authorized check signer to continue to be one, even though they may have not been a church member/employee for years.
More importantly, poor management of signatures indicates poor management of bank accounts. Occasionally churches will even forget about a few bank accounts that are infrequently used. Unfortunately, fraudsters do not forget once they have found an untended, forgotten about account.
KEY: DORMANT BANK ACCOUNTS can be a useful tool to a thief allowing him to store stolen funds and later transferring them to personal accounts with little chance of detection.
Part 5 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“Our church has a formal policy describing the characteristics required for participation on the count team, including limiting related individuals and restricting the same individual from participating in more than one component of the process.”
“Church volunteers are required to “rotate off” their assignments periodically.”
Survey results – 70% of our respondents reported using some type of screening process for determining teller team members. Unfortunately, only 25% reported that they required all team members to periodically rotate off the count team on a systematic basis. My guess of why this number is so low is that, from my observations, many people serving on count teams consider the service they provide a ministry. It is very difficult for many churches to limit anyone’s ministry.
Collusion
If a church does screen its volunteers (as 70% appear to do) why is teller team rotation important to fraud prevention? This question can be answered with one word – COLLUSION. Even the strongest internal control systems can be penetrated when two or more people collude (conspire) to commit economic fraud.
The longer people serve together in any role, the more comfortable with each other they become. Over time, they may become tempted. It is much easier to broach the subject of committing fraud with a close acquaintance, than a stranger.
KEY: Being a relative or long-time friend with a fellow volunteer makes collusion a little bit easier.
Part 4 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“Our church does not allow an individual who serves on the count team, is involved in check preparation, or is involved in general ledger and financial statement presentation to participate in the bank reconciliation process.”
“Someone other than the preparer reviews the completed bank reconciliations.”
Survey results – Around 65% of our respondents reported implementation of these controls. And that is good because…
KEY: The bank reconciliation is the Grand Central Station of your church’s financial process.
Bank Reconciliation
All of a church’s financial activity should flow through the bank reconciliation. If a person has complete control over the bank accounts and accounting processes, AND is given the task of bank account reconciliation, the church has created a HUGE faucet. No, it’s probably closer to a fire hydrant!
KEY: The most effective step that can be taken to alleviate poor segregation of duties is to have someone outside the day to day accounting processes reconcile the bank account.
DOUBLE KEY: This should be much more than just balancing the accounts. This review should include a close inspection of cancelled checks, deposit slips, etc., and looking closely at payees, endorsements and check signers for abnormalities.
Follow these fundraising financial safeguards to ensure that donations are collected securely and properly during charity fundraisers.
Churches and ministries often host fundraisers to support various projects like mission trips, community outreach, facility improvement and staff support. As non-profits, churches rely a great deal on the funds they raise and therefore they have to maintain financial security and trust from the donors which includes creating a secure fundraising atmosphere. Regardless of the size of the church or the number of staff members they use, it is important to maintain a professional approach to donation management and follow safeguards to ensure that church financial fraud is avoided and donors’ contributions are received where expected.
1. Ensure that equipment and food service conforms to safety standards.
Since many events involve food service or use of various equipment, it is a smart move to inspect these features for health and safety violations. If possible, use a certified inspector for conducting these inspections, so that there can be legal support if something goes wrong. If using a vendor, ask for references and qualifications before engaging them for an event. While these activities aren’t directly involved with fundraising finances, it is important to maintain safety in these areas for safekeeping of attendees and protection against lawsuits.
2. Require those responsible for fundraising events to submit financial reports.
According to a survey conducted by our church finance experts, a full third of the respondents have no reporting mechanism for special event fundraisers. While no one likes to assume that a volunteer working at a fundraiser will skim a little of the top, there is nothing wrong with requiring accountability, even as small as having them write and submit a financial report. Safeguards like written reports are a step in the right direction and, when coupled with other measures like multiple persons involved with managing funds and detailed records of tickets and/or products sold, the fundraising event has a better chance of avoiding theft and gathering funds successfully.
3. Secure funds as soon as they are gathered.
Regardless of whether funds are received at one time or continuously, it still should be a priority to secure cash and checks as they accumulate. Keep in mind that it is safer to entrust multiple people with the collection of donations, rather than just one with less accountability, so have at least two people in charge of transporting money from the collection to a safe room where the donations can be kept locked up and safe until counting and banking deposits. With volunteers providing sales reports and volunteers collecting the money, it should be a matter of routine to analyze the reports and totals to make sure they are in agreement.
4. Provide donors with receipts for their tax records.
Donors who wish to claim charitable donations for their federal income tax returns have to provide proof, either in the form of a bank transaction or a receipt from the charitable organization that received the donation. According to the IRS:
“An organization that does not acknowledge a contribution incurs no penalty; but, without a written acknowledgment, the donor cannot claim the tax deduction. Although it is a donor’s responsibility to obtain a written acknowledgment, an organization can assist a donor by providing a timely, written statement containing the following information:
1. Name of organization
2. Amount of cash contribution
3. Description (but not the value) of non-cash contribution
4. Statement that no goods or services were provided by the organization in return for the contribution, if that was the case
5. Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
6. Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described later in this publication), if that was the case”
Even though the responsibility lies with the donor to acquire proof of their donation, a charitable organization that offers the receipts to assist their donors with the task exhibits courtesy and gratitude. By making the proof of donation process simpler, fundraising organizers can encourage even more donations and facilitate the process of raising funds.
Weeds in the Garden provides financial consulting for churches and ministries
If you’re wanting to plan a ministry fundraising event and would like assistance with keeping donations secure and volunteers accountable, contact Weeds in the Garden. Experts at detecting fraud and preventing church theft, Weeds in the Garden has years of experience in church and ministry accounting and financial development consulting.
Part 3 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to these statements:
“The individual who prepares the checks also mails the checks.”
“The person responsible for general ledger and financial reporting also mails the checks.”
Survey results – A little over 50% of the respondents answered the first question positively. However, the number plummeted to 30% for the second.
Separate Accounting Tasks
You may wonder, “What’s the big deal about who mails the check? After all, if the bill has been approved, reviewed and signed, isn’t the process over?”
NO!
KEY: Signing the checks is NOT the last step in the bill paying process.
Here are two things we have seen happen.
One person with this much responsibility was also skilled in the art of forgery. Some of the checks signed were craftily altered and redirected to pay down his credit card balance (which had ballooned due to a problem with gambling). Because this person was also in charge of all of the accounting process, there was little chance of being detected.
Another thief presented checks to be paid which were dutifully signed by the administrator. But these are not the checks that were mailed. The original checks were destroyed, and replaced with checks written to the bookkeeper’s creditors and to a brother-in-law. As this person was in charge of the general ledger, the original checks were reflected in the cash disbursement journal. The phony ones were not. Obviously, this technique is risky because at some point the vendor not being paid will squawk.
Due to this risk, fraudsters who use this method are very selective in which vendors they pick. For example, in one case a bookkeeper switched checks with their church’s contributions to its denominational national office. Because these payments were voluntary, it took many months before the theft was discovered.
KEY: How to avoid this? See our next post on the importance of bank reconciliations.
Part 2 of our series on Segregation of Duties. In our recent Fraud Survey, we asked churches to respond to this statement:
“From the time of collection to the time of the bank deposit, funds are never, even for just a few minutes, in the custody of a single individual or kept in an unsecured location.”
Survey results – More than 65% of the respondents stated that this is true for their church.
Cash Flow Systems
To avoid fraud, it is of paramount importance that a church has a clear understanding of both of its cash flow systems: inflow (cash receipts) and outflows (cash disbursements).
We recommend that churches, at least once a year, flow chart these two cash flow systems. To help in this process, we suggest they compare their cash flows to the flow of water through the church’s plumbing system. What they should be looking for are any points along the way where one person, by themselves, can turn on a cash flow “faucet”. One of the overlooked phrases in this question is “even for just a few minutes.”
KEY: We are talking minutes, not hours – that’s all it takes for fraud to occur!
To illustrate this point consider what happened at one church. At this particular church one usher serving the balcony, removed all of the cash from the offering plate and stuffed it in his shirt as he made his way down two short flights of stairs. In this case we are talking seconds, not minutes!
Part 6 of our ongoing Fraud Awareness in the Church series will examine Credit Checks. PSK in cooperation with the National Association of Church Business Administration (NACBA) conducted a survey to determine the extent of fraud awareness in the church environment. We asked churches to respond to this statement:
Our church conducts credit checks on financial employees and volunteers.
While almost all churches perform criminal background checks on employees and volunteers serving with children, very, very few extend the background check to financial matters.
ONE TRUTH – Potential employees in financial difficulty will bring their money problems with them to your church. (This not only applies to business managers, bookkeepers and accountants, but also ministers who are given oversight responsibilities over a portion of the church budget.)
Unfortunately, many churches learn this lesson after the fact. Performing a credit check PRIOR to hiring can prevent a boat load of misery!
Credit checks require a little more work than criminal background checks. The individual must give their permission and there must be a financial reason for conducting the credit check.
KEY: Credit checks on employees and volunteers who oversee financial matters can help flag and prevent potential fraud in the church.
