Archived version from NCDOCKS Institutional Repository http://libres.uncg.edu/ir/asu/
A Fall From Grace
By: Megan Y. McSwain, Jacqueline J. Wukich, and Dwayne
N. McSwain
Abstract
A visit with Mickey Mouse was one of the last things members of Small Town Church imagined their tithes
would finance. However, that is exactly what happened when Grace Grifter, the church’s secretary and
bookkeeper, embezzled more than $100,000 over a four-year period. Fraud scourges all sectors of the
economy, including nonprofit entities. In fact, it may even come as a surprise to learn that nonprofit
organizations tend to be more susceptible to fraud, considering their altruistic missions. However, this increased
susceptibility is often due to the trusting cultures and limited staff sizes typical of smaller nonprofits. Fraud
detection and prevention help minimize and avoid loss of revenue and damage to an organization’s reputation
and employee morale. It also allows the organization to maintain focus on its mission. This article presents an
example of how credit card fraud can occur in a small organization and the steps that can be taken to help
mitigate any such future risks.
McSwain, M., Wukich, J., &
McSwain, D.
(2015). A Fall From Grace.
Internal Auditing
, March/April 2015.
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A
was one of the last thingsv i s it w it h M i cke y Mou s e m e mb e r s of Sm a l l Tow n Church imagined their ti-thes would finance. How-ever, that is exactly what happened when Grace Grifter, the church’s secretar y and b o ok ke e p e r, e mb e z z l e d m ore t h a n $100,000 over a four-year period.Fraud scourges all sectors of the econ-omy, including nonprofit entities. In fact, it may even come as a sur prise to learn that nonprofit organizations tend to be more susceptible to fraud, considering their altruistic missions. However, this increased susceptibilit y is often due to the tr ust ing cultures and limited staff sizes typical of smaller nonprofits. Fraud detection and prevention help minimize and avoid loss of revenue and damage to an organization’s reputation and employee morale. It also allows the organization to maintain focus on its mission. This arti-cle presents an example of how credit card fraud can occur in a small organi-zation and the steps that can be taken to help mitigate any such future risks.
Grace and the church
Grace was a 67-year-old woman of ten described as “the sweetest old lady you’ll ever meet.” She had been active in Small Tow n Church for nearly 10 years, volun-teering for church functions and singing in the choir. The church trusted Grace, who had worked par t time helping the prev ious secretar y/bookkeeper, Marge Robins on . Once Marge ret ire d, Gr ace took over the position. But unlike Marge, Grace turned dow n offers of help, insist-ing she could handle the work herself.
At one of the church’s monthly budge t me e t i ng s , long t i me bud budge t com -m it te e -me-mb er C lay ton Stew ar t g rew uneasy as he rev iewed the church’s cash numbers. Over the years, Clay ton had obser ved that on average the church’s monthly operating expenses accounted for approximately 80 to 90 percent of monthly tithes, w ith the parson’s salar y being the largest expense. However, this had not held true for the past two years, in which the monthly expenses seemed excessive. As a budget ana lyst for the fe der a l gover n ment , C lay ton told t he other committee members he had a gut feeling something was not right — the numbers were not adding up. Although he wanted to suggest hiring an internal auditor, Clay ton knew the church could not afford the salar y and benefits nec-essar y to attract a competent, qualified professional. Alternatively, Clay ton sug-gested that the church outsource its
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M E G A N Y. M C S W A I N , J A C Q U E L I N E J . W U K I C H , A N D D W AY N E N . M C S W A I N M E G A N Y. M C S WA I N i s a doct ora l st u de nt a t t h e In st i -t u -t e of C ommu n i ca -t i on s Re s e a rch a -t -t h e Un i ve r si -t y of I l l i n oi s a t Ur ba n a – Ch a mpa i g n . JAC Q U E L I N E J. W U K I C H , C PA , i s a C PA i n Te x a s a n d cu r re nt l y a l ect u re r of a ccou nt i n g a t S a m Hou st on S t a t e Un i ve r si t y i n Hu nt sv i l l e , T X .DWAY N E N . M C S WA I N , P h . D. , C PA , i s a n a ssoci a t e
pro-T h i s a r t i c l e p r e s e n t s a n e x a m p l e o f h o w
c r e d i t c a r d f r a u d c a n o c c u r i n a n y s m a l l o r g a n i z a t i o n a s w e l l a s t h e s t e p s t h a t c a n m i t i g a t e f u t u r e r i s k s .
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a pett y cash fund. He wanted to ask the bookkeeper about this, but she had called in sick.
Upon further investigation, Ricky dis-covered expense receipts from Florida and Haw a i i . T he c re d it c a rd re ce ip t s a ls o showed charges from a car dealership, women’s clothing stores, and a cell phone company. Could these charges be explain-ed as church expenses? Perhaps church members took a religious conference trip t o F l o r i d a a n d Haw a i i , re c e i ve d n e w phone ser v ices, bought a new vehicle to transport members from various events, a n d p u rc h a s e d c l o t h i n g t o d on at e t o those in need.
Ricky asked both Reverend Gable and the music director about the credit card c h a r g e s . Re ve re n d G a b l e s a i d h e w a s unfami liar w ith the charges, claiming the church had never received any of the items on the receipts or v isited either Florida or Hawaii. Although Reverend Gable was present at most church func-tions, Grace generally handled the finan-cial side of administering these events. Rick y cont ac ted the credit card com-pany to request a copy of the most recent bi l l. Upon receipt of this bi l l, he dis-covered that the only named authorized user on the credit card was Grace.
When Grace returned to work the fol-low ing day, Ricky and Reverend Gable asked about the credit card charges. At first, she claimed not to know what they were talking about; she denied knowl-edge of a church credit card and said she had never seen the charges before. Ricky told her some of the charges, such as the pay ments to a phone company, were made to accounts in her name. As the only person handling the church’s records, Grace had the oppor tunit y to create a church credit card w ithout any-on e e l s e’s k n ow l e d ge . Fa ce d w it h t h e receipts, Grace confessed to embezzling money f rom the church.
Grace said when she first star ted tak-ing money from the church, she planned to p ay it back. T hen she b elie ved she de s e r ve d t h e m on e y — s h e h ad b e e n through a lot throughout her 67 years. As an only child, Grace took on the med-ical costs that Medicare did not cover w hen her p arent s b e c ame i l l 10 ye ars
Graves, and Berry, a small CPA firm that
had p er for med non-audit ing services
for the church in the past.
Reverend Gable agreed, noting an in-ternal audit would also benefit the church. Church members wanted to build a fel-l ow s h ip h a fel-l fel-l for h o s ti n g re c re ati on a l activities, meetings, and meals. If planned properly, an inter nal audit could help identif y any risks that may prevent the church f rom meet ing its object ives by revealing the areas in which internal con-trols could be streng thened.
The internal audit
Diggs, Graves, and Berr y had three offices and a total of about 50 to 70 employees. Of those, 15 to 20 were non-CPAs who held bookkeeping positions. Most of the firm’s work was regional, w ithin a 250-mile radius. The firm sent Ricky Good-m a n , w h o h a d fou r ye a r s of au d i ti n g experience, to perform the internal audit. Although Ricky had worked for Diggs,
Graves, and Berry for a few years, he had
not audited Small Town Church previously. Ricky knew from experience that a typ-ical internal audit investigation includes inter views and an analysis of documents, computers, and financial statements. When examining the church’s accounting sys-tem for purchases on account, Ricky set out to verif y that all of the church’s pur-chases were recorded. If there were any errors or irregularities in the recording of accounts payable, Ricky hoped to find them by sampling disbursements and trac-ing the supporttrac-ing documents to recorded transactions in the church’s books. After determining the time frame on which to focus his investigation, Ricky compared the church’s accounts payable balance, ratio of accounts payable to purchases, and ratio of accounts payable to total lia-bilities with the same metrics for the pre-vious five years.
When review ing the books, Ricky dis-covered a curious pattern — a check was voided ever y month. Among the church’s e x p e n s e s , h e a l so fou n d c h a r g e s to a credit card in the church’s name. Ricky thought it odd that a small church would have its ow n credit card and wondered if the church used it in place of keeping
ago. To deal with this added stress, Grace turned to shopping and traveling. Even-tually, her lifest yle became more extrav-a g extrav-a nt , extrav-a n d h e r m o nt h l y c r e d i t c extrav-a r d pay ments became too burdensome after h e r hu s b a n d ’s d e a t h t w o y e a r s a g o. Although she had w it nessed a sig nifi-cant increase in collections by the church over the past few years, the church denied her request for a raise. Grace felt resent-ful since she had been such a dedicated employe e for m a ny ye ars . A rel i g iou s w o m a n a n d f a i t h f u l m e m b e r o f t h e church, she volunteered and donated to charities. She was just taking what she believed was owed to her.
So Grace opened a credit card under the church’s name. She alone checked the church’s mail, and when the credit card bill was delivered, she would pay with one of the church’s checks. B ecause she was the only one who handled the finances, it was easy for her to void that check each month w ithout anyone noticing.
Ricky adv ised the church to take pre-cautions when using a company credit card. While credit cards have become ubiq-uitous and can simplif y business trans-actions, they can also increase the risk
with limited staff sizes, such as churches, face additional risks due to their inabil-it y to separate duties. Churches lack the financial checks and balances of other business organizations; a church finance committee consisting of volunteers may n ot prov i de t h e l e ve l of aut h or it y or skills needed for effective church fraud pre ve nt ion . Add it ion a l ly, s e g re gat i ng duties — keeping the books, paying bills, handling cash receipts, manag ing and issuing p ay rol l, and reconci ling ban k accounts — may be difficult for a church w ith a small staff.
Basic internal controls for company
credit cards
R ick y de s c r ib e d t he s e pre c aut ions a s internal controls and prov ided sugges-tions for implementation specific to the church. Internal control procedures can pre ve nt , de te c t , a n d cor re c t f r au d or er rors. Prevent ive controls are prefer-able and ac t as an organizat ion’s first line of defense to help keep fraud from o ccur r ing . If prevent ive cont rols fai l, the second line of defense is the use of detective controls, which help discover EXHIBIT 1 Recommended Internal Controls
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or errors do occur, an organization should have cor rective controls in place to fix the problem and prevent it from reoc-curring. It is important for an organization to have an appropriate mix of all three controls based on the indiv idual r isks of the organization.
The follow ing are some internal con-t ro l s R i c k y re c om m e n d e d con-t h acon-t Sm a l l Tow n Church implement. These basic c o nt r o l s ( w h i c h a r e s u m m a r i z e d i n Exhibit 1) w ill help ensure that credit cards are used for legitimate pur poses. Proper implementation of these controls w ill reduce future inter nal audit find-ings, improve efficienc y of operations, a n d e n h a n c e t h e s a fe g u a rd i n g of t h e church’s assets.
Develop clear policies regarding church
credit card expenditures. Clear policies
should be outlined and understood by all employees authorized to handle church records/finances. This will help eliminate m i s u n d e r s t a n d i n g s o r m i s u s e o f t h e church credit card. Each person autho-rized to use the card should sign a state-ment agreeing to the terms of the church policy and acknowledge the consequences for failure to comply.
C o n t r o l t h e i s s u a n c e o f c a r d s . T h i s
includes the est ablishment of cr iter ia for elig ibilit y to receive a credit card. Only employees who need the credit card to car r y out their official duties should be authorized to use them. In the event t h e c hu r c h g r o w s a n d h a s mu l t i p l e employees who require travel or regular business expenses, additional credit cards may be issued. Credit checks (see item eight) should be performed on all autho-rized users.
The church credit card should have the same securit y and be treated w ith as much prote c t ion a s a p e rs ona l c re d it card. If fraud occurs, the church’s credit c ard comp any should b e immediately notified so that appropriate action can be taken to minimize any further misuse.
S e t c r e d i t l i m i t s a n d n o t a l l o w c a s h
advances. Indiv idual credit limits can
be set based on expected monthly church business expenses of the employee.
Give receipts from credit card charges to
keeping requirements. If the person mak-ing a charge to the credit card does not prov ide a receipt, the treasurer should record that charge as taxable income to that person. All users of the church credit card should be aware of the impor tance of keeping receipts of credit card charges.
Never use the church credit card for per-s o n a l e x p e n per-s e per-s. Church polic y should
require that if any personal charges are made w ith the church credit card accid e nt a l l y, t h e c hu rc h s h ou l accid b e re i m -bursed immediately for the exact amount. Other w ise, the amount w ill be deducted from the employee’s paycheck.
The church credit card should be used only for church business, not for church memb ers’ or employe es’ convenience. The credit card should be used for items the church normally purchases, such as office supplies, special online orders, or f u e l for chu rch ow n e d ve h i cl e s . Fu r -thermore, if the credit card is meant for such small purchases, a reasonable credit limit, such as $1,000, should be adopted. Alternatively, establishing a pett y cash fund for these small purchases may be more appropriate than a credit card; this w ill minimize the risk of larger personal employee purchases. If church members pay ministr y expenses using their per-sonal money, a policy should require the employee to be reimbursed by the church for those purchases.
Credit card purchases should follow t h e c hu r c h’s p u r c h a s e o r d e r s y s t e m . Charging purchases to a church credit card may be more convenient than wait ing for a check to be w ritten, but credit card purchases should abide by the same pur-chase order approval process as all other church expenses. The business pur pose of each purchase should be described.
Have credit card statements reviewed by an individual other than the employee using
the credit card. The statements and
orig-inal receipts should be reviewed to ensure all charges are related to church busi-ness. Additionally, monthly charge totals should be monitored in comparison to previous periods and budgeted expenses. Bank statements and copies of can-celled checks should be reviewed by an indi-vidual outside the cash receipt and cash disbursement process. For a nominal fee,
the church. A credit card statement w ill
not suffice as a receipt for IRS
record-. record-. record-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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the chair of the finance committee or the pastor can have bank statements and co-pies of cancelled checks sent to his or her home. This independent review may par-tially compensate for the church’s lack of segregation of duties. In this case, a reviewer might have noticed the monthly checks to the credit card company, and such amounts would have raised a red flag. Additionally, the rev iewer should ran-domly select disbursements per the bank statement on a quarterly basis and require that support be provided for careful exam-ination. This ongoing monitoring could detect and deter fraudulent activity.
Tr a i n e m p l o y e e s i n a p p ro p r i a t e c re d i t
card use. This t raining should infor m
employees of t he church’s credit c ard policy. Additionally, employees should be required to annually document their job duties, including fiduciar y and ethical responsibilities. This document should include a statement signed by the employ-ee, acknowledging that the church does not permit employees to use the credit card for personal reasons. Such an annual process ser ves as a reminder to both the employees and the board about their re-sponsibilities. In the event fraud is com-mitted by an employee, this documen-t adocumen-t i o n c a n a s s i s documen-t documen-t h e o r g a n i z adocumen-t i o n i n dealing w ith legal repercussions.
Perform initial and annual credit checks on those employees authorized to use the c re d i t c a rd . Employers may r un credit
checks for various reasons, such as the con-cern for employees who are financially strapped. These employees are often dis-tracted at work by their financial woes and may even b e tempted to stea l. On the other hand, employees who responsibly manage their ow n personal finances are often viewed as better, more responsible workers.
Require that board terms not exceed three t o f o u r y e a r s. Ma nd ator y rot at ion of
board members, including finance com-mit te e memb ers , wou ld minimi z e t he i mp a c t of f r au du l e nt a c t i v i t i e s . T h i s
wou l d fore s t a l l a n e ve nt i n w h i ch a n employee mi g ht col lude w it h a b o ard member to commit fraud.
Have church’s finance committee
main-tain a level of skepticism. B ecoming too
comfor table w ith a par ticular employee or existing policies and procedures may limit the committee’s abilit y to identif y risks or ir regularities. The potential for fraud should not be taken lightly. Despite the altruistic nature of the church, it is still possible for fraud to be per petrated by tr usted employees or church mem-bers.
Justice over mercy
Alt houg h t he church was reluc t ant to report Grace to the police because of the negative publicity, Ricky encouraged the church to do so for several reasons, such as increasing the church’s ability to recover what was stolen and prevent ing Grace from repeating this behavior at another organizat ion. As a result of her f r aud scheme, Grace went from serving the Lord to ser ving time in jail. She was arrested on charges of grand theft and scheming to defraud. She is currently being held on $100,000 bail and has been ordered to pay $100,000 in restitution to the church. Credit card abuse is only one of many employee fraud schemes that plague the nonprofit com munit y. O t her s chemes include skimming cash and establishing fake vendors or ghost employees. Several of the control suggestions in this ar ti-cle can help prevent or detect some of these other methods of fraud as well. All orga-nizations, no matter the size, should rec-ognize the value of properly implemented internal controls and internal auditing
functions.1 n
N O T E S
1 This article was based on an actual case. The names
o f t h e p e o p l e , p l a c e s , ch u r ch , c r i m e s , a n d p u n i s h -m e n t h ave b e e n a l t e r e d . Fo r -m o r e i n fo r -m a t i o n o n b a s i c i n t e r n a l c o n t r o l s f o r c r e d i t c a r d s , s e e h tt p s : / / n a . t h e i i a . o r g .
