Notes From The Underground Railroad

Your conductor is Attorney Barbara A. Laners. This column will focus on accountability in church finances. More specifically what could happen when no internal procedures are established to control the flow of the church’s income? While most congregations do not concern themselves with the specter wrongdoing where money is involved, such is a real possibility. A church may find itself embroiled in a situation involving the questioning of unauthorized use of its funds. Some churches find themselves faced with the question of embezzlement of their funds. “Embezzlement refers to the wrongful conversion of funds that are lawfully in one’s possession. Embezzlement is a common occurrence in churches because of weak internal controls. The idea giving rise to embezzlement is that someone has legal control or custody of property or funds, and then decides to convert the property or funds to his or her own personal use.” Although it may be hard to believe, embezzlement is a “relatively common occurrence in churches.” Therefore it is critically important for church leaders to take this risk seriously. If a church takes the risk of embezzlement seriously several situations can be avoided. Churches should act affirmatively so that among other things, the possibility of temptation is removed from both church employees and volunteers; (ii) by employing preventive measures churches may avoid division in its ranks; (iii) the reputation of church leaders may also be protected with preventive methods in place and (iv) churches that take steps to prevent unlawful conversion of funds help to create a “culture of accountability” with regard to church funds. Churches must take steps to prevent embezzlement in order to “reduce damage to the reputation and statute of leaders who otherwise may be blamed for allowing embezzlement to occur.” It is therefore, incumbent upon church leaders to guard against activities where money is concerned which will damage his/her reputation and statute. While the risks are real, many churches will refuse to adopt procedures to reduce such risks because of fear that such measures will demonstrate a lack of trust in persons who handle the church’s fund. However, the commonly used phrase that it is better to be safe than sorry is appropriate in such situations. The question of if and how embezzlement can be reduced is frequently asked. The good news is that a number of steps can and should be taken to reduce the risk of wrongful conversion of church funds. Further the steps to take are quite simple. A church should consider the following preventative measures: A church or churches should put in place an effective system of internal control. In other words, a church should have in place policies and procedures adopted to safeguard its assets and also promote the accuracy of its financial records. Additionally, churches should screen persons with financial responsibility. Screening is a relatively simple process. It may simply involve securing references from employers, prior employers and or other churches or charities with whom the person may have associated. Another procedure employed by some churches is an annual audit of its financial records by a CPA firm. According to Richard R. Hammar, author of Pastor, Church and Law Third Edition (2000) “An audit accomplishes three important functions: (a) An audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced: (b) The CPA (or CPAs) who conducts the audit will provide the church leadership with a “management letter” that points out weaknesses and inefficiencies in the church’s accounting and financial procedures. This information frequently proves to be invaluable to church leaders. More importantly an audit when properly conducted contributes to the integrity and reputation of church leaders and staff members whose responsibility it is to handle church funds. One caution for members, don’t confuse an audit with the more limited activity that CPAs will perform, such as a “compilation”. Some churches may purchase a blanket insurance policy to cover its employees and officers. When purchasing such coverage consider the fact that insurance policies vary. While some may demand than an embezzler be prosecuted, others may not before paying a claim. Furthermore, the time period covered by the policy will vary. These limitations should be considered when researching insurance coverage. Therefore, it is also important to remember that insurance is not a substitute for implementing a sound system of internal control. Ultimately the responsibility for protecting the church’s assets falls to church leaders. Church leaders must also remember that they owe a fiduciary obligation to the church and that they are “stewards of the church’s resources.” Thus they must take all necessary steps to preserve the church’s financial resources and other assets. It is incumbent upon church officials to take their role seriously and guard against intrusion on that duty at all cost.