By Vonna Laue
Trust, but verify when staff and volunteers handle funds.
As an auditor I often write and speak on the topic of internal controls and the importance of protecting the church from fraud. Sometimes people think I have to say these things because it’s my job, or that I’m engaging in scare tactics to get them to implement more work. The reality is I have a real heart for ministries. I understand that churches have limited time and financial resources, and that this can leave them at greater risk.
I conducted an interview at a recent seminar with a church business administrator who serves a ministry where fraud took place. This individual serves a church in Orange County, CA, with a small staff and what it thought were good, basic financial controls in place. The person primarily responsible for the bookkeeping was a trusted individual who had served in that capacity for a few years. There were strong controls in place for Sunday morning contribution collections and deposits, but the church had some weaknesses surrounding cash received at other times and from other places, such as ministry funds within the church.
After the bookkeeper left the accounting department to take another role within the church, the new bookkeeper found paperwork that didn’t seem to reconcile. The church soon discovered that the previous bookkeeper had periodically deposited checks directly into her personal bank account via an ATM, rather than into the church’s account.
The initial discovery process progressed very quickly. The administrator obtained a copy of one of the checks in question and contacted the bank. Within hours, the bank was able to identify more than $50,000 that had been stolen. The individual was confronted and the police were notified.
The process did not finish quickly, however, and included tedious, time-consuming procedures. Several people from the church had to individually sit in a room with a police detective, review checks made out to the church and deposited into the bookkeeper’s account, and sign an affidavit that the funds were meant for the church, not the bookkeeper. The district attorney filed charges, more than $200,000 was determined to have been taken, and the former bookkeeper was sentenced to five years in jail.
Tighten up controls
The pain this created for so many people was immeasurable. People wondered how it could happen in their church. Some blamed certain individuals for allowing it to take place. Others felt the church was too hard on the individual and should never have involved the police. The time and energy it took over many months was a distraction to the church and to the ministry that should have been taking place.
During the process of getting to the bottom of this, the church realized that the bank reviews ATM deposits very sporadically, making the fraud less likely to be detected. In our interview, the administrator noted that the church had auditors who audited or reviewed their financial statements, providing some independent review of their internal control systems.
Management and the auditors had determined that while some controls were lacking, this deficit was not likely to result in a material misstatement or a material fraud. One check a week was all it took, however. “Materiality and cost-benefit analysis are tough when you are dealing with fraud,” the administrator said.
The church has moved on and the administrator looked at ways to tighten up controls he previously thought were adequate. Ministries within his church are now responsible for completing their own reconciliation of funds received, and those are compared to deposits and general ledger entries. Emphasis is placed on making people aware of the risks that exist and the controls that are in place. Trust is viewed differently.
We want you to understand that situations similar to this take place in churches across America every year, and yes, even weekly. The amounts vary significantly, but the results don’t.
While we can’t live each day under a cloud of suspicion, we do have a responsibility to “trust, but verify.” Take an opportunity to carefully consider each area of your financial processing, such as cash receipts, cash disbursements and payroll, and actively look for areas where something could go wrong. When you have identified the risks, you can create adequate controls to mitigate those risks and protect the church you have been called to serve.
Vonna Laue is a partner in the CPA firm of CapinCrouse LLP, Brea, CA. She is the co-author of Essential Guide to Church Finance. www.CapinCrouse.com