Reducing the Risk of Financial Abuse

The headlines are becoming more frequent—revelations that another ministry has been devastated by embezzlement or financial abuse perpetrated by a ministry leader or trusted staff member.

According to studies performed by the Association of Certified Fraud Examiners, churches and religious organizations lose 5% of their revenues to fraud each year. This is a very real risk that all churches are susceptible to. However, there are several steps that churches can take to insulate themselves from this threat. This article discusses the risk of financial abuse and ways to protect your church’s finances. 

Pastors and board members are accountable to each other for the business decisions they make, and they are accountable to their donors for how well they stewarded their contributions. Paul stated: “We want to avoid any criticism of the way we administer this liberal gift. For we are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of man” (2 Corinthians 8:20,21, NIV).

The important thing to remember is that if you lose people’s trust in how you handle your finances, you’ll lose their trust in your ministry. To increase trust in your finances, you’ll want to increase accountability over how money comes into the ministry and how money goes out.

Let’s focus on three areas:

1. Cash collection process
2. Segregating financial duties
3. Strong internal controls 

Cash Collection Process

Here are some tips for strengthening your cash collection process.

• At least two people should collect and count the offering. To reduce collusion, these people should not be related and should rotate often.
• Have team members who count the offering complete a count sheet and sign it. If a deposit slip is prepared later, the deposit slip should be prepared by two people. Any discrepancy between the count sheet and deposit slip should be researched.
• If possible, two people should take the deposit to the bank to increase safety and accountability.
• If only one person takes the funds to the bank, it shouldn’t be the bookkeeper—the person who enters the deposits into the financial records.
• The bank deposit receipt should be compared to the deposit slip and the count sheet. All three forms should be reconciled by someone not involved in all three processes (collecting, counting, and deposit). Any discrepancies should be researched.

Most churches secure their main offerings pretty well, but fail to provide good accountability over other income such as Sunday school, youth events, and coffee shops. Even though these may be smaller deposits, the risk for misuse or abuse is still present.

Segregating Financial Duties

When spending donor funds, there needs to be the same level of accountability as the cash collection process. Good accountability requires proper segregation of duties. Segregating or separating duties has the primary purpose of increasing accountability to prevent fraud and errors. This is why I recommend having at least two sets of eyes on each transaction. Whether that includes a purchase approval process or two signatures on each check, you want to make sure that every transaction has proper review, proper approval, and proper support. This will increase accountability and transparency over your financial activities. While some churches will have good accountability on the actual checks they write, they will overlook automatic payments, wire transfers, or other electronic payments.

Segregating duties should include:

• The person who enters deposit information into the financial records shouldn’t reconcile the bank account
• The person who writes the checks shouldn’t sign the checks.
• At least two people should see each transaction—one requesting and one approving. This can be accomplished through purchase requisitions, or having two people sign checks, or having a board member review and approve the check register and perform the bank reconciliations. 

Strong Internal Controls

The risk of fraud and abuse is very real. I have visited with many church boards who have discovered a trusted staff member has been embezzling funds. Church finances are multifaceted and each segment or process is vulnerable to misuse. Whether it is the cash collection process, writing checks, using credit cards, or paying employees, each of these processes can be strengthened to reduce the risk of abuse.

Are your processes strong enough to prevent fraud and abuse?

If you would like an in-depth assessment of your processes, take a look at Integrity at Stake, Appendix B - available at myhealthychurch.com.