Risk Managers' Forum

Risky financial behaviors of churches and schools

Risky financial behaviors of churches and schools

By Patti Malott

Agents and risk managers must be aware of the common weaknesses found in some church and school financial practices. Without proper procedures in place, these institutions can suffer significant financial loss due to embezzlement or other improprieties. The 10 "weaknesses" that follow can and should be corrected in order to properly safeguard your clients in these fields.

The absence of a written plan

It is critical that a very defined and documented organizational strategy be in place; otherwise, the policies and procedures tend to fluctuate. They become the sole responsibility of whoever happens to be in charge at the time. Add to this rapid turnover in accounting personnel, and you can easily see where problems can occur.

New employees should be immediately trained, as they tend to modify procedures based on their prior experience. Those changes may not be in the best interest of the organization. In addition, church and school finances are usually governed by a finance committee or board whose members serve rotating terms. While rotation is good, a lack of consistent guidelines can contribute to confusion.

A well-developed, written accounting and financial procedures policy will help ensure that the financial responsibilities are carried out in an efficient, accurate, and consistent manner. The policies should be updated regularly in order to maintain compliance with those of the Internal Revenue Service. They should also be frequently communicated to all employees who have responsibilities associated with the church and school financials.

One person does all the work

It is not uncommon to find situations where the financial employee writes checks, signs checks, counts and deposits the offerings, prepares the general ledger and reconciles the bank accounts. Many have learned the hard way that the requirement for purchase orders and countersigned checks is hardly protection against an employee who has complete control of the bank statements.

In developing accounting policies, it is important to have several individuals involved in the management of its cash receipts and disbursements. This not only protects the assets of the church and school, it also protects the staff from unwarranted charges of impropriety. The appearance of impropriety can cause as much or more harm than actual occurrences of theft or embezzlement.

They let the computer do it

One area of poor segregation of accounting duties is the ineffective procedures related to the reconciliation of the bank accounts. Computer programs are great for clearing checks and recording deposits, but they never can perform the real purpose of a bank reconciliation, which is to provide final oversight of the cash process. An independent party and not the person preparing it should review the bank reconciliation.

Poor security of cash

Many churches can be lax in their procedures to collect, count and deposit the Sunday offerings. This is especially true if there is more than one Sunday service. Where is the money stored until the money counters arrive? Is it taken from one building to another by one person? Do they retain backup data (envelopes, copies of checks, etc.)? All churches should think through these procedures in order to avoid potential risks.

The most frequent weaknesses are with the money-counting teams themselves. These teams are often dominated by a few individuals with no rotation of team members. It is also common to find that the financial employee is a member of the counting team. In schools, the financial employee may be the only one counting.

Very clear and defined procedures should be drawn up and frequently communicated to those who have responsibilities related to Sunday church offerings. In addition, a checks and balances procedure should be considered, such as having two unrelated people count the money after it is collected and another party receive it.

Poor new hire, termination and documentation practices

Because employment lawsuits are on the rise all across America, it is extremely important that both churches and schools develop and implement safe hiring practices and procedures. This includes conducting background checks on potential new hires (including credit checks on anyone handling money), legal interviewing and reference checking; proper supervision; regular staff performance evaluations; and wise termination practices. Because of our litigious society, it is extremely important that all decisions are carefully and accurately documented.

The accounting and management policy statement should include extensive coverage of personnel procedures such as, but not limited to, salary and benefits, training, sexual harassment, termination, credit card policies, and other stand-alone policies such as issuance of keys, church or school equipment, etc.

A copy of this policy should be given to all new employees when they begin employment, and they should sign off that they have read it, understand it and will follow it. The church or school should also conduct well-documented, regular performance reviews. Terminating an employee without proper documentation could put the church or school at risk for a lawsuit.

Employees working with finances should be required to take at least a whole week of vacation at a time each year (preferably twice a year) and someone should be assigned to fill their role in their absence. This is a good check and balance that could prevent embezzlement or fraud in the early stages. It is also a deterrent to committing such behavior.

All the eggs in one basket

All of the bank accounts or activities should be included on the financial statements. Sometimes churches and schools will make the mistake of not including everything for the following reasons:

• There is not an existing line item on the chart of accounts.

• It was an effort to segregate idle cash from general operations to protect it from being spent.

• A separate department or ministry has its own set of books.

A church is responsible for all monies collected in its name and for its purposes. Each and every activity should be included in its monthly financial reports. This includes schools that operate as a ministry of the church. Too often we find that the church is keeping one set of books and the Mothers Day Out program or church weekday school is keeping another. If the school falls under the umbrella of the church, it should at least be included as a fund or department on the church financials. If audits are conducted on one, they should be conducted on the other.

Little or no financial accountability of special events 

Special events, such as retreats, banquets, weeknight dinners, and athletic events are often overlooked in the accounting arena. Many churches and schools do not keep track of these events and do not reconcile tickets or items sold. Often money will be taken out of the cash box to pay for items needed for the event.

Each event should include a documented process specifying how money is collected and deposited. Expenses should be paid out of the normal invoice cycle with a church or school check. The cash in the collection box at the end of the event should be reconciled with the tickets.

Because these funds normally are a fraction of the budget, they are considered insignificant and often no accountability is included in the collection and depositing process. Regardless of the immaterial dollar amount, the problems that can arise if impropriety occurs will definitely be material.

Netting of revenues and expenses

A common tendency for churches and schools is to combine revenues and expenses into one budget line item account. Revenues, even reimbursements, should be recorded separately from expenses for the following reasons: 

• Provide an all-inclusive picture of what has truly occurred.

• If the church or school were to go through an IRS or insurance audit, the practice of netting revenues to these accounts could make the audit a very tedious and costly one.

• The budget process is much easier when the person preparing it can look at actual revenue versus expenditures.

Care should also be taken to make sure expenses are charged to proper accounts (apples to apples). When line items within the budget are already overspent, there is a tendency to find another line item that can be charged. We call this "apples to oranges." This can result in a blurred picture of what activity actually took place and can distort financial reporting.

Non-reconciliation of balance sheet accounts 

Balance sheet accounts should be reconciled monthly. Often, accountants and bookkeepers will run activity through the Prepaid and Accounts Receivable line items on the balance sheets. These are netted accounts until they are run through the revenue and expense accounts. Too often, they are left unreconciled. Those accounts should be zeroed out often and reconciled back to the appropriate accounts.

Beware of fictitious donors and contribution statements 

There are many ways to hide or move monies through an accounting system that is not carefully set up. For instance, most accounting systems will allow you to set the controls where journal entries are tracked by the user and locked from being deleted. That is imperative for good accounting controls.

However, there are other ways to route and embezzle money. On two different occasions last year in my consulting practice, I found that donors' records were set up as blocked to receiving any contribution statement and their contributions re-routed to a balance sheet account and on to the employee. Church and school personnel should review donors' gifts and send a thank-you or statement. Another safe practice is to create a policy that routes all calls concerning a person's contribution statement to someone other than the person posting the donations.

Conclusion

Agents need to direct specific questions to the people in charge of churches and schools in order to make them aware of potential financial pitfalls. Making them aware of ways to mitigate potential risks can create the win-win situation we are always looking for.

The author 

Patti Malott is the founder and president of Upright Ministries, a national risk management consulting firm whose mission is to protect ministries by safeguarding people and streamlining processes. Contact her at patti@uprightministries.com. For information on the Certified Risk Managers (CRM) program or the Certified School Risk Managers (CSRM) program, go to: www.TheNationalAlliance.com.