Author: willingsteward

What is fraud as it relates to the church? Fraud encompasses a broad range of corrupt activities. It is generally defined as a misappropriation of assets through mishandling of assets, fraudulent reporting and corrupt acts. Fraud is a crime. Yet, many of our churches have faced this issue in silence. They have chosen to “extend grace” to the perpetrator or demand restitution. Rarely are these fraudulent acts reported to the authorities.

Many churches fail to report fraud if it occurs in senior leadership because of the emotional toil it can take on the church. It is a moral failure and trust is broken with the leadership and the members. It takes a significant long-term negative affect on the congregation if it is not addressed quickly and effectively. The loss of trust erodes the foundation of the ministry. Congregants began to withhold their gifts or leave the church which places the ministry in crisis mode.

Small and medium sized churches are the prime targets for individuals to commit fraud. Small churches often have one or only a few volunteers willing to provide financial management support for the church. These environments have limited segregation of duties and provide ripe opportunities for misappropriations or stealing. Avoid these 3 red flags:

(1) One person has too much control and too much access to church funds.
(2) Only one person counts and deposits the money received.
(3) One person has access and the authority to sign checks.

Those who have the highest level of authority and the most access to church funds pose the greatest risk because they have more opportunity. There are many legal cases of fraud in churches by both genders, all ages, races and ethnicities. Fraud frequently goes undetected because we give too much control or access to individuals and use trust as an insufficient substitute for internal control procedures. Most pastors and congregants are not trained to recognize financial irregularities therefore basic internal control procedures must be implemented.

Brotherhood Mutual Insurance reports that embezzlement in churches is on the rise. It is reported that more than $70 billion dollars are stolen from churches worldwide each year and 80% of fraud is never reported. It has been said to me far too many times, that we know that individuals are “skimming” off the top within our church structure from the top down. Misappropriation is a fraudulent act and should not be covered up in our church environments.

Cynthia Gordon-Floyd is a certified public accountant and founder of Willing Steward Ministries, LLC. Willing Steward Ministries (http://www.willingsteward.com) is a financial consulting and accounting firm for churches and other faith-based non-profits and specializes in Bible-focused financial practices, pastoral compensation issues, IRS compliance, and other financial needs specific to churches. Cynthia is a graduate of Lake Forest College and received her Master of Business Administration in Accounting from DePaul University. She is a Steward and the Financial Secretary at the First AME Church of Manassas in Manassas, Virginia.

During my corporate career, I was provided with a hands-on, trial-by-fire education in seeking financing, analyzing loan documentation and a clear understanding of how for-profit organizations deal with and manage their banking relationships. This background has proven invaluable as I serve churches in a banking environment frequently hostile to churches. We unknowingly contribute to this hostility when we approach banks poorly prepared. Our lack of preparation usually results in our loan application being declined. A significant portion of my financial ministry is spent with assisting churches with preparing to present themselves to banks for a refinance, purchase or building project. There are several things churches can do to present a well-prepared loan application that will yield results.

First, it’s important to understand that large loans are secured on cash flow, not relationships. Despite even long-standing relationships, banks will require a three-year financial history for your church which will include a 3-year Statement of Activities (Income Statement, for-profit term) and 3-year Statement of Financial Position (Balance Sheet, for-profit term). The bank will also ask for information about the pastor, senior leadership, church history and denominational financial responsibilities.

Next, you must know the applicable statistics for your church membership. Banks focus closely on the amount of debt requested per contributing member; this is one of the first calculations made to determine eligibility. Therefore, you need to know your number of giving units (contributing adults). You need to know how many persons are under 18 and over 65 years of age because these groups may not be able to substantially contribute, due to lack of employment or retirement.

Lastly, you need to have some money in the bank. Ideally, you should have twelve to twenty-four months of debt service (principal and interest) available in cash. As an example, if you want a $500,000 loan and you only have $5,000 in the bank then you do not have the cash flow to pay the debt service on the loan you are requesting. You should be able to show that you are able to consistently pay a lease or rent that is comparable to the new loan monthly debt service that you are requesting, and that you are able to grow your cash balances each month because you consistently have money left over. In other words, you need to show you have more than enough money to pay and you have a proven track record of spending less than you bring in.

Cynthia Gordon-Floyd is a certified public accountant and founder of Willing Steward Ministries, LLC. Willing Steward Ministries (www.willingsteward.com) is a financial consulting and accounting firm for churches and other faith-based non-profits, specializing in Bible-focused financial practices, pastoral compensation issues, IRS compliance, and other financial needs specific to churches. Cynthia is a graduate of Lake Forest College and holds her MBA in Accounting from DePaul University. She is a Steward and the Financial Secretary at the First AME Church of Manassas in Manassas, Virginia.

In a recent article, “Reporting Financial Crime as a Matter of Stewardship,” attorney, and C.P.A. Richard Hammar discusses why we should report financial crime.

A study of financial misconduct of 706 church leaders, found that one-third of them had experienced fraud and 70% of those chose not to report the incident to the authorities. The following reasons were provided for not reporting the incident:

• They recovered the money without needing legal action.
• They pursued restoration and forgave the perpetrator.
• They wanted to protect the perpetrator and the reputation of the church.
• Legal action was contradictory to their beliefs.

The Bible teaches us that we should not deal with our legal matters in a secular court of law. Without disputing the clear direction of the Word of God, it is still important for us to apply the value of the laws and God-given rights that protect citizens and support proper restoration.

When we choose not to report criminal matters within the church, there are several ramifications that prohibit proper restoration. First, the actual amount of the loss is usually far greater than the perpetrator admits. Professionals can investigate properly and determine the actual loss. Second, if there is no public record of the occurrence, it may subject another church to the same offender as there would be no record to show on a background check. Additionally, most embezzlers are also guilty of tax evasion, as they do not report the amount misappropriated as income. This provides another level of crime not dealt with in its proper manner. Even if the church chooses to forgive the matter, they should provide a 1099 to the individual for the loss so they are forced to pay income taxes on the amount taken.

Forgiveness and grace always have their place. Yet negating the law, and not allowing proper discipline to occur interferes with proper restoration for all involved. There is no Biblical reason for the church to cover up crime; in-fact, it can be a wonderful opportunity to show the importance of proper stewardship over their funding, as well as a chance for the public to witness the biblical restoration for the offender.
If we tolerate a lax internal control environment, we should not continue to be shocked and dismayed when our lack of oversight results in major loss and devastating life disruptions for the innocent. Accountability is our responsibility and our reasonable service.

Cynthia Gordon-Floyd is a certified public accountant and founder of Willing Steward Ministries, LLC. Willing Steward Ministries (www.willingsteward.com) is a financial consulting and accounting firm for churches and other faith-based non-profits, specializing in Bible-focused financial practices, pastoral compensation issues, IRS compliance, and other financial needs specific to churches. Cynthia is a graduate of Lake Forest College and holds her MBA in Accounting from DePaul University and is an A.I.C.P.A. certified non-profit accountant. She is a Steward and the Financial Secretary at the First AME Church of Manassas in Manassas, Virginia.