control, and governance
control, and governance
September 2011 Online Exclusive
Fraud in Faith-based Organizations
Internal auditors in churches and other faith-based settings can help “protect the flock” by understanding potential exposures associated with affiliation and ensuring recommended controls are in place.
Deborah Seifert
Assistant Professor
Illinois State University
Edward Seipp
Instructional Assistant Professor
Illinois State University
Deborah Lindberg
Professor
Illinois State University
Fraud occurs in every type of organization and is committed by people from all walks of life. When perpetrated in faith-based organizations, such as churches, the activity constitutes a form of affiliation fraud — that is, when a member of a group commits fraud against that group. Affiliation fraud may go undetected for a long time, largely because others in the group are reluctant to believe that “one of their own” would take advantage of them.
Guided by tenets of forgiveness and compassion, members of faith-based organizations arguably are more tolerant of human frailties. Fraudsters may thrive in this environment and leverage the goodwill and kindness extended to all members of the group. Numerous stories of pastors pilfering from the collection plate or bookkeepers embezzling church funds have made headlines in recent years, demonstrating that faith-based organizations are by no means immune to the risk of fraud (see “Recent Examples of Fraud”).
The Fraud Triangle model, which categorizes drivers of fraudulent behavior, is an important tool for determining organizational susceptibility to affiliation fraud. Understanding this model can help internal auditors in faith-based settings to consider the many reasons fraud might be committed at their organization and advise management accordingly. Additionally, a list of recommended controls can help ensure management has the right measures in place to overcome the potential pitfalls associated with the influence of affiliation.
THE FRAUD TRIANGLE
The Fraud Triangle is a conceptual way of considering the potential for fraud in an organization. Developed in the 1950s by criminologist Donald Cressey, the model includes three factors: a motive to commit fraud, the opportunity to commit fraud, and rationalization of the act of committing fraud. When all of these factors are present, an individual who has previously been honest may be more apt to steal — even someone from a faith-based organization, such as a church. In the absence of sufficient oversight, someone handling church cash collections, for example, may have the opportunity to commit fraud. If that person also needs or wants money to pay bills, foster a lavish lifestyle, care for a sick loved one, etc., then he or she may actually steal funds, perhaps rationalizing that they will “put it back” next month. But there are countless examples of people stealing even more the next month, and the month after that, instead of replacing what they “borrowed.”
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Recent Examples of Fraud The ability to defraud a faith-based organization based upon affiliation has been brought to light through several recent incidents:
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Motive
Those associated with a church or other faith-based institution may have numerous motives for committing fraud. By their very nature, these organizations may attract individuals who have a history of human frailty such as drug addiction, gambling, or crime. They might seek out the organization for the spiritual guidance and healing it offers. But these reformed volunteers put the organization at a risk of fraud if they have not truly overcome their personal weaknesses.
The leadership or employees of a faith-based organization may also suffer from human frailty, including greed. These individuals might seek a leadership role or employment where they have greater access to resources that they can divert.
Opportunity
Faith-based organizations can present unscrupulous affiliates with numerous opportunities for fraud. In part due to resource constraints, these groups often rely extensively on volunteers. Moreover, volunteers and others in the organization typically focus on service to others, not on internal controls. Hence they may not consider the controls that should be in place for areas such as cash handling and record-keeping, and neglect to address opportunities for fraud. And even if they do consider fraud risks, the leadership of a faith-based organization may lack the required professional expertise to address those risks. Some faith-based organizations have never developed appropriate controls, are lax in their application, or have let them lapse over time. In fact, many are not required to be audited regularly, and they may not be able to afford to hire someone with an accounting background who can help establish effective controls.
Faith-based organizations may not even consider basic controls such as tagging and photographing assets or establishing a security system. Moreover, enforcement of adequate controls may fall short because of the appearance of not trusting members of the organization. Many faith-based organizations are uncomfortable with placing too many restrictions on their volunteers due to the desire to maintain an open and welcoming environment.
Rationalization
The rationalization for fraud in a faith-based organization could be related to leaders believing they have been shortchanged for the services they provide. For example, a pastor who feels that he or she makes very little money in return for the many demands of the congregation may feel justified in “taking a little extra.” Or, some individuals may believe that God actually provides for them by making the resources available in the church. They may tell themselves that they will “borrow” from what God has provided and give it back to the church at a later date.
RECOMMENDATIONS
Faith-based organizations can implement numerous controls to mitigate the possibility of affiliation fraud. In particular, cash receipts from collections and cash disbursements constitute areas ripe for improvement in many faith-based settings.
Cash Receipts From Collections
Faith-based organizations regularly seek cash donations from their constituents. For instance, churches pass the collection plate among their members and guests during worship services, and funds collected usually include both cash and checks. If not safeguarded, cash may be stolen. Checks may also be stolen or altered, or diverted into a personal account. Accordingly, suggested controls over cash receipts include:
- The ushers should place the collection in a tamper-proof bag, seal it, and place their signatures across the seal after gathering receipts during or after a church service. This will allow the collection counters to ascertain whether they received the collection receipts intact.
- At least two counters who are not related to each other should be present when the collection is tallied. Spousal teams should not be allowed, because related parties provide an increased opportunity for collusion to steal money from the collection.
- Counters should work on a rotating schedule, preferably not on the same weekend each month. As a result, the opportunity for uniform skimming of funds will be diminished.
- Any discrepancy found between the amounts indicated on the outside of an offering envelope by the donor and the actual contents of the envelope should be corrected and initialed by two counters.
- The counters should prepare a collection summary report indicating the amount donated through weekly envelopes and the amount of loose change (i.e., coins, currency, and checks not in envelopes). The report also should show the total of all checks as well as a total of all cash. The counters should prepare the deposit slip and place the deposit in the bank’s night depository.
- The deposit receipt prepared by the bank should be compared to the collection summary report prepared by the counters, and any abnormal differences should be investigated. The comparison should be done by someone independent of the counting and bank reconciliation functions.
- The weekly loose-change collection totals should be monitored over time for unusual trends or anomalies.
Cash Disbursements
Disbursements made from the funds of faith-based organizations should only be for expenditures authorized by leadership, with oversight by a governing board. Several guidelines can help ensure appropriate disbursement practices:
- All checks written over a certain amount should require two signatures.
- All disbursements over a certain amount should require prior approval of an overseeing body such as a church council, finance committee, or board of trustees. This also includes disbursements requested by church leadership.
- All disbursements should be approved for payment by someone in church leadership.
- Bank statements and cancelled checks should be examined for unusual disbursements (i.e., checks written to church leadership, employees, or the chairman of the finance committee) by someone other than the person writing checks.
- A bank reconciliation should be completed each month for all bank accounts by someone other than the person who writes/signs checks. Furthermore, the person preparing the bank reconciliation should not be involved in the collection or depositing of funds.
General Recommendations
The goal of deterring fraud is more likely to be accomplished if several recommendations are followed by those charged with the governance of a faith-based organization:
- All persons handling money — leadership, employees, and volunteers — should be bonded. At a minimum, the bonding company should perform a financial background check on the persons being bonded. This background check may uncover a prior history of embezzlement or may disclose situations, such as poor credit, that increase the risk of embezzlement.
- The governing body responsible for overseeing the organization’s finances should meet on a regular basis. Often these bodies exist but meet rarely or infrequently. This body should discuss the financial statements and ask questions about unusual items.
- The organization should have an approved annual budget. Many smaller organizations fail to do this, sometimes based on the belief that it is not necessary to plan the financial future because “God will provide for our needs.” While this may be true, a budget provides an effective benchmark so actual results can be compared against expected results and any major deviations can be investigated.
- The organization’s income statement or “sources and uses of funds” statement should be compared with the results of the same period the previous year. This comparison may point out unusual deviations from one period to the next that may warrant further investigation.
KEEPING THE FAITH
Faith-based organizations may be at risk for fraud due to their very nature of open acceptance and reliance on volunteers. The concept of the Fraud Triangle demonstrates that given the “right” combination of motive, opportunity, and rationalization, even people in a faith-based organization may commit fraud. However, with a few simple controls over cash receipts, cash disbursements, and general governance can greatly reduce fraud exposure.
To comment on this article, email the author at iaonline@theiia.org.
Fraud in Faith Based Organizations
Both small and large churches rely on "Volunteer Members" for financial and operational purposes. In most cases no one performs background checks, e-verify or any other security functions.Fraud and theft are seldom revealed and in most cases the thief is "Forgiven" of his sin and sent on his way. Internal control should start in the home office of a denomination with the establishment of an Internal Audit department that can travel both nationally and internationally to churches and perform annual financial and operational audits. Every penney that rolls out of the U.S. Treasury says "In God We Trust". Let's get back to basics and provide a little protection for Him. Thank You.
Posted By: Raymond L. Higginbotham, CFE
2011-10-08 8:35 AM
Fraud in Faith-Based Organizations
The article could have not come at a righter time. I am working with a faith based organization as a CAE. But my organization is regulated by the country's Central Bank. However I see that not only the volunteer workers but everyone, the MD,and the others directors are susceptible to fraud; either by allowing their "Father of faith" to do as he wants within the bank by ordering them to authorize payments and loans absolutely against the ethics. The biggest danger is that these fathers brainwash the professionals with "The Lord talks through me, if you dont obey you are acting against the will of the Lord" cliche and many others. I have seen my collegues who have worked in the banking industry for at least fifteen years go absolutely bananas. I thing there should be moderation. Those working in such positions as mine should ensure, as it is our job is one hundred percent ethics, that they train them on the areas of fraud and risks associated with them. I have many to say, but let me end up here today.
Posted By: Chemo Mutani
2011-09-26 4:39 AM
Fraud in faith based organization
The audit process must consistently include deliverable like written audit report to board of trustees. The trustees goals and objectives must be consistent with the faith based organizations own faith who otherwise would not have become members of such faith based organization at the first place. Written audit committee charter helps communicating the objectives of the audit to the the board of trustees also. Changes in the board members cannot automatically change the faith based organization own belief all the time. This is looked within the audit process that includes deliverable like distribution of audit report.
Posted By: Harish Kumar
2011-09-23 9:24 AM
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