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Focus on Not-For-Profits: Protecting Your Religious Organization Against Fraud and Abuse

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Despite numerous reports of fraud and abuse, most religious organizations are reluctant to admit that they could find themselves a victim of fraud by one of their own members or employees.

Religious institutions strive to build a trusting relationship with their members and employees that are built on the foundation of religious beliefs. This environment, coupled with tight budgets and limited financial oversight, makes religious organizations particularly vulnerable to fraud.
December 18, 2014

Despite numerous reports of fraud and abuse, most religious organizations are reluctant to admit that they could find themselves a victim of fraud by one of their own members or employees.

Religious institutions strive to build a trusting relationship with their members and employees that are built on the foundation of religious beliefs. This environment, coupled with tight budgets and limited financial oversight, makes religious organizations particularly vulnerable to fraud.

More than 80% of internal fraud reported involves asset misappropriations such as cash receipts, cash disbursements and payroll schemes, as well as property theft. Being aware of your religious organization’s key internal controls related to its cash receipts, cash disbursements, and payroll is an excellent start to strengthening the organization’s financial internal control environment and in turn, decreasing the likelihood of someone committing and concealing fraud. As religious organizations often have few individuals wearing many hats, internal controls, particularly those related to segregation of duties, require careful planning and consideration.

Internal Controls Over Cash Disbursements

The area of purchasing and cash disbursements tends to be the most commonly associated area where fraud and abuse occurs. The following duties should be segregated as much as possible: purchase requests or authorizations, receiving purchased items, recording accounts payable, approval of invoices, check writing and/or initialization of electronic transfers, mailing of checks and monthly reconciliations of bank accounts.

Additionally, general internal controls surrounding cash disbursements that should be in place include:
  • Use of pre-numbered checks in sequential order and monitoring control over check stock
  • Limiting the use of signature stamps and prohibiting the signing of blank checks
  • Always updating check signers when a change occurs
  • Receipt and review of unopened bank statements by someone not involved in the recording or authorization of cash transactions
  • Reconciliation of all bank accounts monthly by someone not involved in the cash disbursements process and review by another independent party
  • Regular monitoring of expense account balances against budget
  • Use of positive pay, a fraud prevention service offered by banks
  • Requiring two signatures on all checks over an established threshold and providing signers with supporting documentation when checks are presented for signature
  • Mailing checks immediately, preferably by someone not involved in the cash disbursements process
  • Reviewing vendor payment history and establishing controls over new vendor set up

Internal Controls Over Cash Receipts

When considering misappropriation of cash receipts and segregation of duties, at a minimum, those tasks surrounding collection and handling of funds, recording collections and maintenance of church member donation records should be segregated.

Additionally, general internal controls surrounding revenue and cash receipts should include:

  • Discouraging cash payments, if possible
  • Immediate restrictive endorsement of checks received
  • Timely depositing of funds received – including cash and checks – particularly after heavy holiday collections
  • If daily deposits are not possible, utilizing overnight safe with limited access
  • Maintaining cash receipts log of amounts received, including payor name and amount, form of payment and description of what the payment is for
  • Periodic reconciliation of cash receipts log with deposits made to bank
  • Periodic reconciliation of cash receipts log with revenue recorded in accounting records
  • Periodic distribution of member statements including identifying a person responsible for receiving notification of concerns should statements not contain all donations made (this person should not be involved in the accounting function)

Internal Controls Over Payroll

While there are many ideal payroll-related internal controls, the most critical involve the separation of duties associated with the personnel function (i.e. new employee set up, rates of pay – including pay increases, employee withholding and removal of terminated employees) from the roles associated with the actual accounting function (i.e. timesheets, recording payroll, distributing payroll checks and reconciling the payroll bank account).

  • The following include recommended internal controls surrounding the payroll process:
  • Consider use of a separate zero balance account for payroll disbursements
  • Maintaining detailed payroll registers which include each payroll check, gross amount, withholdings and net pay amount
  • Regular review of payroll registers and annual W-2’s, payroll tax reporting and 1099’s by an individual not involved in the cash disbursement process
  • Approval of all salary and wage rates by a financial officer or appropriate management

Remember, there are no absolute guarantees fraud will not occur, but segregation of duties and practical consideration of internal controls can set the tone at the top and go a long way towards protecting the assets of your religious organization.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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