The phone calls all begin the same way. “She/He worked here for 20 plus years. We all loved and trusted her. We thought she was a saint. None of us suspected she was taking this money. I am sick to my very core. How could this happen to our church?” My next question often meets with a standard response. “When was your last external financial examination?” The response is invariably, “more than five years ago. “
The Association of Certified Fraud Examiners (ACFE) produces a once a year report on fraud. The 2018 Report to the Nations (ACFE) found that the median loss for religious, charitable, and social services to be $90,000 per occurrence. Google searches are filled with church fraud articles showing that churches/nonprofits are more likely to have fraud happen to them than for fraud to occur in a secular business. Business loss is normally reported near 5% while church fraud loss has been reported up to 6.5% of revenue. My last fraud examination found the perpetrators had taken over $500,000 from a medium sized church (The perpetrators have confessed, been arrested, and are currently awaiting trial).
Why is this the reality for Biblically based and service-oriented organizations? The main reasons (based on 25 plus years of experience) are (1) lack of internal controls, (2) unaddressed ethical values, and (3) a blind naivety wrongfully labeled as trust. It is very clear that all of us are capable of some level of wrongdoing. Given overwhelming opportunity, rationale, and motivation; any one of us could violate our ethical compass and take advantage of those placing their trust in us.
The best way to prevent this destruction is to spend time reviewing our ethical positions, establish strong internal controls, and have a faithful accountability partner. An objective person/examiner willing to ask us the hard questions and then encourage us to walk an ethical life.
When we practice naivety and call it trust, we are confused. The truth is that verifiable accountability can lead to greater trust and a lack of accountability often leads to diminished trust. Most of us know this from experience as parents. Most nonprofits however fail at verifiable accountability in their responsibility as leaders and committee members.
Churches are not required by law to have an annual audit and therefore when budgets are tight and financial exams are expensive, there is pressure to scratch the audit line from the operations budget. There are however, many positive aspects to having an audit. Having an annual financial examination gives your organization the opportunity to express appreciation, for a job well done, to your staff members. Having the review can lessen the power of unethical temptation and perhaps even save someone’s career. If someone makes a false financial accusation against a staff member, the annual audit can quickly extinguish this destructive flame. The exam may also provide learning opportunities for your staff and committees as well.
The main financial threat nonprofits face is fraud. When selecting a company to carry out your financial exam, please consider a Certified Fraud Examiner (CFE) and then add familiarity with church/nonprofit financial dealings as requirements for your annual exam. Ensure that the examiner begins with a fraud risk assessment and then uses this assessment to lead their exam toward the areas of greatest concern.
We should be encouraged to view verifiable financial accountability as a foundational stone for stewardship. May God bless you and your organization.
With respect and appreciation,
Daniel Hylden MBA CFE
(903) 944 8866