Fraud in Churches

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There may be nothing more disheartening in the world of fraud investigation than a church employee caught embezzling. Unfortunately, there are fairly regular news reports of financial fraud at churches. Fraud hits churches hard. Many churches operate on shoestring budgets to begin with. A sizable fraud can put a church on the brink of financial collapse.

And it’s appalling to think this is happening in a place that many view as the most sacred and the most likely to attract honest people. Unfortunately, churches and other non-profits aren’t immune to fraud. In fact, they often set themselves up to be even more vulnerable to fraud than your average business.

Diverting Donations

Historically, churches were often run largely by pastors who had little to no business training. But the time has come for churches to get serious about operating like real businesses.

One of the key principles in setting up financial controls in any business is the segregation of duties. In lay terms, segregation of duties means not giving any one person too much control over a function or department. It means splitting the function into pieces so that more than one employee is involved with the function. In this way, the employees will be providing natural checks and balances over the work of each other.

In a church, the most important functions to be segregated are the collection of donations and the depositing of the money in the bank. Lots of cash is brought in by churches, so it’s important to have more than one person involved with the cash, to hopefully ensure that the money doesn’t walk away unnoticed.

Many churches are good at having teams of people count weekend collections, and this is a great start. The people counting the money are double checking one another’s work, and there are multiple witnesses to the amount of money collected on any given weekend. This makes it pretty difficult for one person to run off with money at this stage of the game.

The problems for a church most often begin at the next stage of the game. The donated money is often put into a safe on church grounds, but then what?

Many times the church bookkeeper or secretary will take that money to the bank to be deposited and then update the church’s accounting records. But there’s a big problem with this.

If the person making the deposit is also updating the church’s books, there is ample opportunity to steal, cover up the theft, and make sure the bank statement is reconciled without any hitches. Someone could look at the church’s financial statements and bank statements, and have no idea that any money was missing. After all, the books balance, don’t they?

Dividing Duties

Imagine, instead, if the money was deposited in the bank by one person, and the accounting records were updated with count sheets certified by the count team. If the person depositing the money stole any of it, the problem would come to light as soon as the bank statement was reconciled by the person updating the accounting records.

The record keeper knows exactly how much money was supposed to be deposited based upon the sheets from the counting team. Any other amount deposited to the bank can be automatically identified as suspicious.

Sadly, too many churches allow one person to have complete control over the process of depositing money and updating the accounting records. This violates one of the most basic controls over money in any business.

Employees of non-profit organizations will often say that it’s not their fault that they don’t have proper segregation of duties over the collection of donations. They don’t have enough employees to do it. That’s simply not true. Even with two employees, it is possible to segregate this function and provide better control over the money.

How many churches do you know that don’t have at least two employees? I can’t think of any. At the very least, each church has a pastor and a secretary. That’s enough to start implementing some basic controls. And for churches with more employees, segregating duties between three or four people will give an even higher level of control over the finances.

No longer can churches operate on the basis of trust and the “old way” of doing things. If it’s the way they’ve always done it, there is probably lots of room for improvement.

Churches need to start operating more like real businesses, and implementing better controls over the money is the most logical and most important place to start.

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