Practical Steps to Reduce Your Church’s Fraud Risk

reduce your church's fraud risk

Practical Steps to Reduce Your Church’s Fraud Risk

Practical Steps to Reduce Your Church’s Fraud Risk

No organization is immune to the risk of fraud. Unfortunately, fraud can be especially harmful to churches because it can damage finances as well as member and donor trust.

The median loss for religious, charitable, and social services organizations is $78,000, according to the Occupational Fraud 2022: Report to the Nations study from the Association of Certified Fraud Examiners (ACFE). More than half (52%) of all organizations in the report did not recover any of their fraud losses.

Fortunately, there are steps you can take to reduce your church’s fraud risk.

Understand the Risk of Church Fraud

Start by understanding the risk. As a quick overview, research has continually shown that occupational fraud schemes fall into three primary categories:

  • Asset misappropriation, which occurs when an employee steals or misuses the organization’s resources. Examples include theft of cash (including checks), false billing schemes, vendor fraud, and inflated expense reports. Asset misappropriation schemes were the most common but least costly fraud schemes in the 2022 ACFE report, accounting for 86% of cases and a median loss of $100,000.
  • Corruption schemes in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to benefit personally. Examples include bribery and conflict of interest transactions. This was the second most common type of fraud in the ACFE report, involving 50% of cases and a median loss of $150,000.
  • Financial statement fraud, which occurs when an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports. Recording fictitious revenue, understating expenses, and reporting artificially inflated asset values fall into this category. This is the least common but most expensive type of fraud, at 9% of cases in the ACFE report and a median loss of $593,000.

It’s also important to be aware that although external audits provide valuable recommendations and evaluations of your internal controls, including the identification of fraud risk, they are not designed to detect fraud. The ACFE report found that while 72% of victim organizations in the U.S. and Canada had external audits of their financial statements, external audits only revealed fraud in 4% of the cases reported. By comparison, 5% of fraud cases were initially discovered by accident.

The following are some effective ways to reduce the risk of fraud in your church:

Ensure Proper Segregation of Duties (Preventive Controls)

It’s important to design controls to ensure that no one individual in your church has multiple, incompatible duties in the following areas:

  • Access to record transactions in the general ledger
  • Access to bank accounts
  • The ability to approve transactions and authorize payments

To make sure this is maintained, implement a policy to review the segregation of duties of key staff periodically (at least annually) and whenever duties change or are reassigned.

It’s also important to document key accounting processes and internal controls in an accounting manual and review them periodically to ensure they are being followed.

If your church staff is too small to achieve adequate segregation of duties, appoint a knowledgeable elder or volunteer to review financial transactions after the fact (known as detective controls).

Implement Additional Internal Controls

We also recommend that you:

  • List each way cash comes into your ministry and each way it goes out. Always involve multiple people in these processes to provide extra accountability.
  • If your church has a small staff, involve an elder or a responsible member volunteer in the processes of collecting and disbursing cash.
  • Have your board treasurer or an elder periodically review the senior pastor’s church credit card statements and the church’s bank statements (including images of canceled checks from the bank). Let the pastoral staff know that this review is being performed. A church leader’s perception that someone is monitoring his or her management of church funds is often the greatest deterrent to fraud.
  • Train and educate staff members about what actions constitute fraud, how fraud can harm the church and its mission, and how to report questionable activity. This training has minimal cost and is highly effective.
  • Ensure you have the right controls in place for remote work.
  • Consider implementing a way to accept anonymous tips, such as through a hotline. Tips accounted for detection in 42% of the fraud cases in the ACFE report. This is nearly three times as many cases as the next most common method of detection.

While it’s tempting to think that fraud will never happen in your church, it’s important to implement controls to help reduce the risk of fraud and detect it quickly if it does occur.

CapinCrouse offers a free Fraud Risk and Prevention Questionnaire to help you assess your church’s fraud health. You can also learn more about fraud prevention and other important considerations for church leaders with our free e-book, The Four S’s That Keep Church Leaders Awake at Night.

About the Author

Rob Faulk
Partner and Church and Denomination Services Director at CapinCrouse

Rob has more than 40 years of financial leadership experience in serving both for-profit and nonprofit entities, as well as more than eight years of direct ministry experience as Executive Pastor and CFO of large churches. He serves some of the largest churches in the United States as well as colleges, universities and seminaries, rescue missions, and other nonprofits. Rob holds an MA in Ministry Management from Azusa Pacific University Graduate School of Theology and is a frequent conference speaker and author of articles on nonprofit financial matters.

More About Rob Faulk
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