Integrity at Stake: Safeguarding Your Church from Financial Fraud

FOREWORD

THE CHURCH, parachurch ministries, and nonprofit organizations are designed to be conduits of hope and rays of light that result in the transformation of people’s lives. However, when an organization neglects good stewardship practices, it can lead to fraud and financial abuse. When this occurs, it diminishes that ministry’s Kingdom influence.

There have been some improprieties that are so acute that the government is actually wondering if churches and nonprofits are complying with the law. All of this causes the church and the ministry to lose credibility and ultimately its ministry effectiveness.

If there is one thing better than a minister of a church or a CEO of a nonprofit organization publicly admitting mistakes and asking for forgiveness, it’s NOT having to have a public reading of transgressions!

My friend and colleague, Rollie Dimos, has devoted his life to helping Christ-centered organizations earn and maintain high levels of trust through developing high standards of accountability and practice. He gets it . . . both the ministry and management!

Integrity at Stake is not a fictional book. These are actual situations that caused financial setbacks and were embarrassing to the ministry. Interestingly, each of these could have been avoided if greater accountability and transparency were embedded in the ministry’s policy and practice.

Caution: The subject material in this book may prevent you from experiencing any fraudulent schemes in the ministry you lead!

— Doug Clay | General Treasurer The Assemblies of God National Leadership and Resource Center

INTRODUCTION

THE BIBLICAL PATRIARCH JOB understood adversity. He knew despair. He had experienced loss of health, loss of family, and loss of fortune. In the midst of unfathomable grief and loss, his wife and friends were encouraging him to turn his back on God. However, Job didn’t waver in his convictions. He understood his character was on the line.

His integrity was at stake.

Job was pressured to compromise, but he stood firm in his convictions and didn’t sin against God. He maintained his integrity, and he maintained his honor.

I’ve been involved in the financial operations of various churches and nonprofits for almost twenty-five years. From performing the bookkeeping, to being elected treasurer, to providing consulting services to pastors and boards as an internal auditor, I’ve been involved in all aspects of a ministry’s financial operations. I’ve served alongside ministries with good financial practices, and I’ve been able to help other ministries improve poor practices.

But over the years, I’ve seen people who, unlike Job, compromised their integrity and committed financial abuses. Abuses that included:

• Pastors and bookkeepers writing church checks to pay for personal expenses for their family and friends

• Church staff using the church credit card for personal charges

• Pastors hiding unauthorized transactions from the board

• Ministry leaders transferring funds to secret bank accounts

• Churches having to close their doors because they failed to send their payroll taxes to the IRS

The world is suffering an economic crisis — and our churches are not immune to this crisis either. We often think that fraud only happens on Wall Street; but, sadly, it also happens on Main Street — in the midst of our churches.

We may think of organizational fraud as a victimless crime since the organization isn’t a real person and companies should have sufficient funds to recover the loss. However, when fraud occurs in the church, significant spiritual ramifications linger long after the financial effects have passed. The church will have probably lost some funds, but financial abuse performed by a spiritual leader can ruin the leader’s ministry and possibly destroy a church, leaving a building full of people whose faith has been shattered in its wake.

Misuse and abuse of ministry funds occur due to the lack of accountability — in some of the cases mentioned earlier, accountability was virtually nonexistent.

I encourage churches to embrace accountability and transparency, two essential keys that will minimize risk and help your church fulfill its mission. By adding a few simple internal controls, you will increase the accountability and transparency of your nonprofit organization, bring integrity to your financial operations, and in my opinion, characterize biblical stewardship!

But everyone in the church must embrace accountability and transparency. These two keys must be part of your church culture and DNA. Most importantly, they must be modeled by your leadership. Remember, pastors, as you model accountability and transparency in your churches, your staff, church board, and congregation will follow!

Over the next few chapters, I will discuss the importance of accountability in your ministry’s financial operations and reveal the impact that poor controls have had on various churches and nonprofits. I pray that as you read through this book, you will understand how embracing accountability and transparency will help the success of your ministry and protect your church from financial fraud.

WHO SHOULD READ THIS BOOK

WITHIN EVERY ORGANIZATION, someone has the primary task of managing the organization’s finances. No matter the title — bookkeeper, accountant, treasurer, or chief financial officer — these people have the day-to-day responsibility of receiving income, paying bills, recording transactions, and preparing financial reports. Certainly, they also have a responsibility to make sure assets are safeguarded and proper controls are in place to minimize the risk of fraud.

However, this book is also written for many others within the organization who are charged with the responsibility to steward nonprofit resources and prevent the misuse and abuse of donor funds, including:

• Pastor/President. As pastor, you may also fulfill the role of president, chairman of the board, or chief executive officer. You probably don’t count the offering, make deposits, or post transactions into the financial records, but you decide when and where funds are spent. You also have the authority to bypass established policies, which sometimes circumvents controls. This book is for you, to help you realize the importance of implementing and enforcing a system of internal control.

• Treasurer/Chief Financial Officer. Your role includes managing the financial operations and providing reports on the current status of finances. It is important for you to know financial controls are in place and operating effectively.

• Accounting Staff. Whether your title is accountant, bookkeeper, finance specialist, or accounting clerk, you handle the day-to-day financial transactions for the organization. The accuracy and integrity of the organization’s finances rest with the accounting team.

• Deacon/Board of Directors. Your role, as the governing board, includes making sure finances are managed effectively while propelling the organization forward in fulfilling its mission. You’ll want to make sure segregation of duties and other financial controls are in place to safeguard the organization’s assets while protecting the integrity of the organization and its staff.

Essentially, every employee in the church or nonprofit ministry plays a part in preventing fraud. No matter your title or role, this book will reveal how fraud can occur in churches and other nonprofit organizations and how you can prevent it.

SECTION ONE

FRAUD

A Frank Discussion on the Potential Risks to Your Organization

ONE

FRAUD RISK:

WHAT EVERY LEADER NEEDS TO KNOW

FACING THE FACTS

You might have read this headline in 2009: Father and Son Pastors Plead Guilty to Stealing $3.1 Million from Church.¹ Or maybe you read about the pastor who embezzled $700,000 from his congregation,² or that $1.3 million designated for church planting was misused by pastors.³

Many times, we think that fraud only happens in large corporations like Enron or WorldCom, but it can happen to small nonprofit organizations too. Unfortunately, many religious and charitable organizations may think their organizations aren’t at risk because they employ people who, they feel, possess strong moral and ethical convictions. Others may erroneously believe that strong controls require additional staff and great expense. As a result, leaders let their guard down and fail to implement processes with strong controls that ensure accountability.

One of the most frequent abuses in church finances is using nonprofit funds for personal use by stealing cash from the offering plate, writing unauthorized checks, or using the church credit card for personal expenses. External pressures such as personal debt, medical crisis, or an unexpected job loss can cause even the most loyal employee to make a rash and unfortunate decision. These perpetrators may rationalize their actions by thinking of the theft as just a temporary loan, fully intending to pay it back. Others justify their actions because they feel underpaid or undervalued and believe they are owed the extra pay.

In 2014, the Association of Certified Fraud Examiners examined 1,483 fraud cases, of which 10.8 percent occurred at nonprofit organizations.⁴ First-time offenders, with no prior criminal convictions, perpetrated the fraud in 95 percent of all cases.⁵ For those nonprofit organizations that experienced fraud, the median loss was $108,000.⁶

If a fraud occurs, the church will lose more than just money. Donor confidence will rightly be weakened, and they may decide to reallocate their contributions to other organizations. Further, the reputation of the church and its pastor in the local community could be permanently damaged.

Can your church afford a loss of this magnitude? More importantly, do you know how to protect your organization from fraud?

INTEREST FROM ALL SIDES

Accountability and transparency shouldn’t be exercised just for the donors in the pews. These safeguards are also important to the many other organizations watching you. Certainly, donors want to make sure their contributions to a particular ministry are used responsibly and further the ministry’s stated goals, but external interests also monitor the accountability and good governance of nonprofits.

Media and watchdog groups keep a keen eye on nonprofit activity to ensure it is transparent and responsible. State attorneys general are interested in protecting the funds donated by their constituents, and the IRS requires that nonprofits comply with appropriate rules and regulations for tax-exempt groups. In fact, from 2002 to 2012, the percentage of tax-exempt returns examined by the IRS has doubled.⁷

Congress also watches to make sure religious organizations