Church Embezzlement: How to Lower the Risk

In many situations, the pressure and rationalization to commit fraud are outside a church’s control.  The opportunity isn’t. The best chance at lowering risk of fraud is by lowering the opportunities prevalent in the system for fraud to take place.

Sister Susy had been the church treasurer and primary Sabbath School class teacher for many decades.  Everyone admired her strong desire to serve and the children loved her class. No one ever questioned her work as treasurer. Reimbursements were processed in a timely manner and month-end reports showed money in the church’s bank account. Everyone was happy that Sister Susy was in control of the finances. The church’s resources were in good hands.

However, one day the story broke and the police arrived at the church entrance: the dear sister had been embezzling church resources. The small amounts Sister Susy had taken from the loose offerings over the decades added up to thousands and thousands of dollars. When asked why and how this had happened, Sister Susy said, “At first a student at the church school needed some help paying for tuition. Then someone else needed financial help. It just became a habit. I always intended to pay it back…”

There are many stories of embezzlement. Sadly, these situations happen too frequently. Whenever a new case is reported, we may be left wondering:

What would have stopped that fraud from happening?

Could the church have protected its resources better?

According to the Association of Certified Fraud Examiners, three elements must exist for fraud to occur.

• Pressure – An individual must have a motivation or financial need for them to commit fraud. With Sister Susy, the student had no way to pay for tuition.
• Rationalization –A person must justify why what they are doing is not wrong. Sister Susy was using the money to help people in need. She had also promised herself that she would pay it back.
• Opportunity–A chance for fraud to happen must be available. Weaknesses in a church’s internal controls provides opportunity. Complete trust was placed with Sister Susy to count offerings, deposit, and record funds with no accountability or oversight. The opportunity to “borrow” church resources was available to her.

In many situations, the pressure and rationalization to commit fraud are outside a church’s control.  The opportunity isn’t. The best chance at lowering risk of fraud is by lowering the opportunities prevalent in the system for fraud to take place. 

Internal controls are processes an organization has in place to ensure there is integrity throughout the financial system. Common weaknesses in these controls might exist because of tradition. 

“We’ve always had our church treasurer count and deposit our offering.”

“We’re too small of a church to worry about that.”

Or simply because controls aren’t a high priority. These weaknesses can easily be discovered by asking some questions:

• Do we have enough people involved in the process?
• When was the last time we evaluated the established controls for weaknesses?
• Are we placing too much trust in one person’s good character?

Often a potential fraudster will discover an opportunity when an innocent mistake slips through the church’s controls. Later on this discovery is acted on when financial pressure is felt and justification found. During the holidays, the pressure is often intensified and can leave people feeling as if they have to donate or financially help those in need. By periodically meeting and reassessing your financial controls, these opportunities can be reduced.
 

Setting Up Internal Controls  

Keep in mind you want internal controls that protect the resources while not overburdening the individuals doing the work. These controls should be efficient and effective.

Segregation of Duties – It is ideal to separate bookkeeping and depositing responsibilities. If possible, when the treasurer is on vacation, an assistant treasurer should fill in to increase the chance of detecting suspicious activity.

Handling of Cash – Cash should never be counted alone or taken home. Without a paper trail, cash is the most susceptible resource to fraud. Encourage members to always donate with sealed envelopes or online.

Approvals – Have processes in place for designated signatories of checks, approval of large payments, and reconciling statements. These processes should include multiple individuals.

Conflict of Interest – Be aware of a member’s potential benefit from offering a “good deal.”

Always remember that establishing good financial controls are in the best interest of our churches and treasurers because these controls provide protection.  If an accusation is made, the internal controls in place are one of the only securities available to fall back on. These controls will vouch for the accused’s innocence.

The responsibility to mitigate the risk of embezzlement falls on all of us as church leaders. Each of us is responsible for the safe-keeping of our church’s financial resources. When a gift is donated, that giver is extending trust to our financial volunteers and internal controls which ensure their donation reaches its requested destination. This trust must be reinforced by having a process that relies on more than just a fellow believer’s good character.