When trust isn’t enough: Protecting your ministry from insider fraud
Embezzlement is abundant in the nonprofit world, yet few faith-based organizations are prepared to prevent it.
“We didn’t see it coming.”
“We thought it couldn’t happen here.”
“It came out of left field.”
These are common responses when houses of worship and nonprofits are victims of embezzlement. What makes this crime distinct is that it’s always an inside job: The theft came from someone leaders know and trust.
Embezzlement results in shock, anger and mistrust. Leaders feel both foolish and victimized. Church members and donors wonder if their gifts are in good hands.
Fraud is the norm
Embezzlement is shockingly common in the faith-based world. One of three houses of worship is defrauded. Nonprofits lose an estimated 5 percent of their revenue to insider theft. Sadly, it’s easy to find examples of embezzlement, including three reports from this year.
A board member of a New York church was accused of stealing more than $3.8 million from his congregation. The state alleges he directed funds into a secret account and doctored church financial reports to cover his tracks.
A Georgia United Methodist Church closed after its administrator was arrested for diverting more than $500,000 for personal use.
A former pastor of an AME Zion church pled guilty to taking more than $500,000 for personal use, including expenditures on firearms and gambling. Core to the deception was a bank account titled “administrative expenses” with the pastor as the exclusive signer.
In circumstances such as these, it’s rare to find someone who says, “I was skeptical all along. Something seemed off but I didn’t ask any questions.” Rather, news of an allegation is usually met with shock and dismay.
This is understandable. Why? Because we’re remarkably bad at detecting fraudsters in our midst. They look like you and me. They’re often kind, charming and can quote scriptures. This is a trait embezzlers share with sexual predators: They look normal and come from all walks of life. Therefore, intuition, instincts and gut feelings will almost never detect them.
In addition, houses of worship and ministries are built on trust. Few board members and leaders sign up so they can hold the organization accountable or audit its practices.
The solution
Since operating “by the gut” is hopelessly flawed, organizations need rules to protect themselves. These must apply uniformly to everyone with no exceptions (even for “Betty” whom everyone has known and loved for 45 years).
Although this won’t blunt the most sophisticated embezzlers, controls will make it increasingly difficult to rip off your ministry.
The most basic level of financial oversight includes:
Requiring multiple signatures before paying an invoice or other funding request.
Splitting financial responsibilities so no single person has total control.
Reviewing credit card billing and other expenditures. What is being purchased and why?
Engaging an outside accountant to help manage and oversee the integrity of your finances – even if it’s only for periodic auditing.
These are merely starting points. Accounting and finance professionals can help your organization develop a healthy system of checks and balance that meets your unique needs. It needs to be layered enough to prevent fraud, but not so complicated that you can’t function.
Insurance is the firewall
Creating a culture of openness and accountability is the first line of defense. But ministries may also desire a backup plan. If someone steals large sums from your organization, you may not get it back – especially if its already been spent.
Financial bonding insurance can help churches and nonprofits recoup financial losses that result from criminal activity. An insurance payment won’t erase the memory of betrayal or restore mistrust, but it can take some of the pain out of the financial bite.
There are some conditions of coverage that may be hard for some ministries to accept. While a church may opt to “forgive and forget,” an insurance company will not pay a claim unless charges are filed. A related requirement is that evidence of fraud is required, not mere suspicion. The final payout is ultimately dependent on the insurance contract. It’s not an open-ended amount.
Insurance is not a substitute for financial controls. Rather, it complements them. While each insurer has different requirements, all will ask for evidence that a house of worship or nonprofit is taking action to prevent fraud. Common questions asked by insurers include:
Are bank accounts reconciled by someone who is not authorized to deposit or withdraw?
Is a secondary signature of checks required? If not, who is the signatory?
Are donated securities subject to joint control of two or more employees or volunteer leaders?
Are all officers and employees required to take annual vacations of at least five consecutive business days? (This is recommended to prevent one person form continually accessing finances.)
Is there a written policy regarding electronic fund transfers?
What is the largest single amount that can be transferred?
DO fund transfers require more than one person to authorize them?
Are hard copies of fund transfer confirmations received and reconciled?
Frequency of deposits:
Are detailed records of bank deposits made?
Are audits performed by a CPA?
At what frequency are audits completed?
Who reviews the completed audits?
Is the audit made in accordance with generally accepted auditing standards and certified?
Are new hires subject to background checks?
Are payroll systems audited annually to detect fraud from “ghost” employees?
Is a physical inventory made of church property?
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