(previously posted at my other blog, Nonprofit Update)

 See this article for a sad illustration of disbursement fraud.  The specific technique was opening credit card accounts in the name of the company and then using the account for personal expenses. 

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People who study fraud tell us there is a “fraud triangle”. Remember discussing the fire triangle when you were in Boy Scouts or Girl Scouts? Just like you need to have heat, fuel, and oxygen to kick off a fire, you need to have opportunity, motivation, and rationalization to kick off a fraud incident.

I have written a series of posts on my other blog, Nonprofit Update, about the fraud triangle.

I combined the posts into one page so you can see all the discussion together. See the Fraud Triangle.

(previously posted at my other blog, Nonprofit Update)

What could you do when there aren’t enough staff to have someone other than the bookkeeper prepare the bank reconciliation?  Bank recs are complicated.  For many small organizations, the staffing is so thin that there is no one other than the bookkeeper who has the skills to prepare them.  What to do when you just can’t split up those duties?

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(cross-post from my other blog, Nonprofit Update)

Maintain dual control over the offering! You hear that unending refrain from us accountants.

Document those disbursements!  Another routine comment you hear.

One story in scriptures has a good illustration of the first control along with missing the boat on the second idea.  Jehoiada, the priest during the reign of King Joash, did a good job on the dual control over the offering and not so great on accountability for the disbursements.

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The impact of a fraud incident in a local church is devastating. The repercussions spread out like the ripples of a rock thrown into a calm pond.

I have written a series of posts on my other blog, Nonprofit Update, about a major fraud at a church near me. I have a number of friends who worship there, so this disaster is quite real to me.

I combined the posts to one page so you can see the discussion chronologically. This series is called the Tragedy of Fraud.

Here is the full text of my article, Essentials of Internal Control, appearing in Church Management News from Bank of the West.  The online article is here.

The article discusses three key ideas:

• The bookkeeper should not sign checks
• Trust is NOT an internal control
• Review unopened bank statement by someone outside of accounting

Essentials of Internal Control

By James L. Ulvog, CPA

The business administrator of a nearby church has been formally charged with embezzling close to $1 million over four years, according to a recent newspaper article. Few details are publicly available. I have friends who worship there, so this hits close to home. I grieve for my friends, the congregation, believers whose faith has been shaken, and even the accused man and his family.

Last year, the bookkeeper of a women’s shelter in my area was sentenced to one year in prison for embezzlement. The executive director of the center was quoted in a newspaper article as saying the shelter had to sell one of their several houses in order to keep operating. The director said eighty women and their children were denied services.

I was going to start this article with a rational appeal to logic as the way to encourage more emphasis on internal controls in our churches. Instead, I would like you to ponder the devastation that follows in the wake of a disaster that can arise from a breakdown in internal controls. The previous reports are only two examples. One of the main goals of developing internal control is to prevent these situations. I could tell you of many more tragedies. A few moments of searching the internet will find dozens of stories.

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I wrote an article for Bank of the West called Essentials of Internal Control.  It discusses one superb internal control you should be using for cash, explains that trust is not an internal control, and offers a creative idea to improve control over cash.

A one sentence summary of internal control is at the end of this paragraph:

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Local churches normally have extremely tight staffing. This is not news to anyone.

Small churches and small parachurch ministries usually can get the bank reconciliations completed, do so accurately, and usually finish on a timely basis. I won’t go into detail on how to prepare a bank rec because I think everyone has that nailed.

Let’s take a moment to discuss the best practice for bank reconciliations. Then we’ll look at the reality and what could be done to improve controls.

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