By their nature, faith-based organizations and their boards, personnel, donors, beneficiaries, and other stakeholders embrace trust and forgiveness. While these are very important laudable core values, be aware that they can also leave an organization at risk for fraud.
Unfortunately, your organization’s mission alone is not sufficient to protect if from violations of trust. The reality is that the faith of religious organizations and their stakeholders can create a culture of unquestioned trust in leaders and personnel, without the necessary levels of oversight, inquiry, risk assessment, and internal control. This puts the organization at risk for breaches of trust that can result in fraud (Herbert Snyder and James Clifton, “Stealing from the Collection Plate: Fraud in Churches and Religious Groups,” Fraud Magazine, Nov./Dec. 2005).
Trust violators fall into three categories: Perpetrators, enablers, and abettors. Perpetrators of fraud may purposely target smaller, trust-based organizations with the intention of skimming donations or making fraudulent payments to themselves. More commonly, though, perpetrators are trusted employees who explain away their actions (rationalization) because they are faced with a financial problem (incentive). A lack of internal control (opportunity) allows them to solve their problem by embezzling or misappropriating assets from the organization.
Without appropriate controls, an organization can unwittingly become an enabler by providing the opportunity for a vulnerable employee to stumble and commit fraud. Further, faith-based organizations with a culture of trust and forgiveness may be reluctant to prosecute an employee who has misappropriated assets. Although Leviticus 6:1–7 supports restitution for fraud, the board may decide to extend grace and dismiss the employee rather than seek repayment or prosecution. Leaders may also fear damage to the organization’s reputation and trust of its stakeholders if an embezzlement becomes public knowledge. But the discreet dismissal of an employee perpetrator may result in the organization unknowingly becoming an abettor to the perpetrator’s future victimization of another trust-based organization. The leadership team of the first organization has then become a trust violator themselves by causing harm—no matter how inadvertent—to another organization and its stakeholders.
The board and leaders of a faith-based organization have a fiduciary responsibility to protect the organization’s reputation, stakeholders, and assets, as well as the larger community it serves. So what can your leaders do to protect against the harm caused by breaches of trust resulting in fraud?
Fraud risk oversight is the responsibility of those charged with the governance of an organization, commonly the audit committee or the board of directors. According to the American Institute of Certified Public Accountants, the audit committee should take an active role in the prevention, detection, and deterrence of fraud (“Fraud and Responsibilities of the Audit Committee: An Overview,” American Institute of Certified Public Accountants, 2010).
What should leaders of organizations do when fraud is suspected or detected? We recommend that those charged with governance, typically the audit committee, first assemble a fraud team that includes the insurance carrier, legal counsel, and a CPA/forensic specialist. If the organization will be making a claim on the insurance policy, the insurance carrier will expect you to accumulate evidence, file a police report, and take steps to prevent further loss. The audit committee or board may decide to seek restitution from the perpetrator through mediation or a civil lawsuit, or to involve law enforcement for a criminal prosecution. Either of these actions will require investigation and the collection of evidence to be used during dispute resolution hearings or before a court of law. The insurance carrier, law enforcement officials, and other involved parties will likely seek advice and services of CPA forensic accountants.
Choose an accounting firm with experience working for churches and not-for-profit ministries, one that also has a forensic accounting services team. This will give you the expertise you need to implement effective fraud prevention and detection measures. The accounting firm will help your organization establish a fraud risk assessment and management program that involves developing, implementing, and monitoring the following:
[Some of these would only be appropriate for churches with extended ministries as schools or daycares. All ministries should seek to reconcile conflict in a Biblical way.—Ed.]
A breach of trust harms a faith-based organization, its stakeholders, and the larger community of believers. But with the right oversight and accountability, this harm can be prevented without damaging an organization’s trusting culture.
Reprinted from the Nonprofit Issues Newsletter (Fall 2011). Used by permission of Capin Crouse LLP.