Internal Controls Best Practices for Your Catholic Organization
Mary Stange – Client Advisor at St. Joseph Financial Services
Fraud
You may have seen the recent articles put out by Game Spot, “Priest Arrested For Using Church Funds On Candy Crush And Other Mobile Games” or “Massive Parish Theft Calls for More Internal Controls,” from The Pillar.
As a steward of your parish or school, you may be asking yourself, ‘How do I prevent this from happening here?’ It’s a question that should truly remain in the forefront of operational decision making. We’re here to help.
Fraud Triangle
In the 1970s, criminologist Donald R. Cressey, published the fraud triangle model. Stating that fraud offenders all share three basic elements, rationalization, pressure & opportunity. These elements are important to draw attention to, as nine out of ten times fraud offenders have no prior history in this arena. Additionally they often seem like model employees and only 13% of convicted fraud offenders have had a poor performance review.
Rationalization: This is an internal thought process that leads to the conclusion that either the funds won’t be missed or that they are owed to them. Perhaps they were unhappy with a raise or bonus, or did not receive a promotion they thought they deserved. Oftentimes, this internal rationalization includes normalizing the behavior.
Pressure: These external pressures can come from any arena of their life. Perhaps a change in their circumstances, an unexpected expense, or a traumatic life event. This person may be in fight or flight mode and the idea of fraud appeals to their instincts around survival. In a social media driven world, these pressures can also come from comparing one’s life to others and feeling like they need to keep up somehow.
Opportunity: The real prevention of fraud comes from prevention of opportunity. Opportunity to commit fraud can exist in environments where external controls are absent, unmonitored, ineffective or unenforced. It’s not the first time they’ve run a certain process or task unmonitored, it’s habitually absent controls that enable fraud.
Ethics
Hiring people with a high sense of ethics who seek to do right in the world can be difficult as well. The 10-80-10 rule of ethics states that only 10% of people will habitually do what is right and seek to better the environment around them. Whereas 80% of people chose their own interests above the idea of the good of all. Another rare percentage is that 10% of people do not allow morality or ethics to influence their life at all. If it cannot be guaranteed that all of your employees have the same moral compass, then it is up to the infrastructure and safeguards of your church or school to keep people accountable.
Internal Controls
Internal controls help you actively prevent fraud through a proactive approach to creating an infrastructure of accountability and oversight. The three arenas to counterbalance the fraud triangle are Oversight, Role Clarity & Data Fidelity.
Oversight & Transparency: If it is commonly known that work will be checked and will be run through several different levels of review, then it becomes harder to find opportunities for committing fraud. This includes being open and perhaps vulnerable about a change in Christmas bonuses, or to sit down with someone who didn’t receive a promotion to go over what they can do to improve for the next opportunity. If accountability is something expected from the top-down in your infrastructure, then employees know that they are being treated fairly and without bias.
Role Clarity & Segregation of Duties: The baseline for segregation of duties is that no one person should be responsible for every aspect of a financial transaction or process. Framing the need for this segregation of duties and clarity in roles in the light of protecting the integrity of your employees can help implement a change if one is needed. Pay particular attention to processes that need an authorization or approval prior to completion.
For church leaders, it is important to review the collection counting process regularly. Additionally, for schools major fundraisers or auctions would be a place to review. Ask questions like:
- Who is involved in the process?
- Is anyone ever alone with the money?
- Do the final deposits and reports balance against what is reported in your donor accounting system?
Data Fidelity: The goal of data entry in accounting is that your accounting software should match what is present in the banking details at all times. Accounting software that allow you to sync with banking activity can preserve the integrity of the data. A culture of accountability is also something that allows for data fidelity. Employees should have the clear expectation that their roles be fulfilled in a timely and efficient manner in order to facilitate necessary reviews and authorizations.
What if You Suspect Fraud?
- Gather evidence
- Analyze financial statements for inconsistencies.
- Review your internal controls and make appropriate changes.
- Finally, if all signs point to fraud, engage a forensic audit. Forensics will tell you what happened and how it occurred.
With advanced outsourced accounting services with SJFS, you can be assured that extra steps are taken to secure data, prevent unauthorized activity, and anonymize checking account information. Contact us today to learn more about how with can help with your Catholic organization.