How to Combat Fraud With Church Governance
Faithful people are taught to trust. Nehemiah and his people trusted God to restore and rebuild Jerusalem. But when working, they worked with one hand, and kept the other hand on their swords (Nehemiah 4:17-18). Nehemiah had absolute trust, and he also was smart enough to protect his people.
According to Mark Scherling in Practical Risk Management for the CIO, 10% of people are always ethical, 10% of people are unethical, and 80% of the time, ethics depend on the situation. What does this mean for your church?
Whether a potential fraudster is unethical or is someone who makes a bad decision ‘just this once,’ your organization must protect itself against fraud from (statistically) 90% of the population.
What Leads Individuals to Commit Fraud?
The Fraud Triangle is a well-known concept in the finance world. The Fraud Triangle as described by the Association of Certified Fraud Examiners lists three criteria necessary for fraud to take place:
- A perceived financial need (i.e. motive). For example, an employee realizes he needs money beyond his current means.
- Rationalization. The individual must make a mental excuse to allow herself to commit the fraud. Remember, 80% of people committing fraud are not always unethical people.
- Opportunity. There must be some sort of control weakness for fraud to happen.
The Response: Set the Tone at the Top
The ‘tone at the top’ sets the stage for the likelihood of fraud. If the leaders of an organization are trusting and lack an appropriate oversight structure, they create a position of vulnerability.
Small businesses (fewer than 100 people) are twice as likely to have fraud committed against them than larger organizations. Non-profit, small organizations are even more susceptible to fraud. Many not-for-profits are mission-driven, so the focus is not on internal controls or fraud prevention.
The Solution: Appropriate Governance
In the words of Nonprofit Quarterly, “[Fraud] is a people problem, so combat it with governance.” The church board is typically charged with a church’s fiduciary duties. The best practice is to seek the advice of a trained CPA who can document internal controls and recommend rectifying any weaknesses. Thereafter, those in positions of trust must maintain those controls.
We cannot control motive or ability to rationalize, but we can control and limit the opportunities for fraud to take place.
With appropriate internal controls, we can stop or significantly limit fraud before it ever happens.
What governance do you need to put in place to protect your church today?