1 page Executive Summary for accounting case Due in 2 days, and a speaker’s notes

INTRODUCTION

Light twinkled through the stained glass windows as Pastor

Peter Lang walked through Saintly Church. He had just

met with Sandy Withers, a CMA® (Certified Management

Accountant) and two-year member of the church’s governing

board. Lang and Withers had been discussing the fact that

the church was perennially short of funds—although what

church wasn’t these days?—and the possibility of instituting

some new internal controls for oversight.

As a board member, Withers was part of the group

responsible for managing Saintly Church’s overall business

and nonbusiness affairs. Such responsibility included

implementing policies regarding church administrative

policies and procedures. Although the church had grown

significantly over the past 20 years, board members had

made few of the administrative policy changes suggested

by advisers and the church’s denomination headquarters.1

The church was primarily operating under a system of trust.

The following passage illustrates the majority viewpoint

of the board: “Trust is the emotional glue that binds a

team together and produces confidence…. High-achieving

churches have a high level of trust among the staff. It means

the lead pastor trusts the staff, the staff trusts the pastor, and

the staff trusts one another.”2

While Withers agrees with the basic sentiment, she also

believes that too much trust could create problems. She

explained to Pastor Lang that trust is simply not a valid

internal control. She referenced a recently-read article stating

that the environments of not-for-profit organizations (including

churches) often make them more vulnerable to fraud and

abuse than for-profit businesses because of the reasons listed

in Figure 1. Pastor Lang can see the point Withers was trying

to make, but he could also see that putting in internal controls

would likely mean additional work for him and other church

workers. He asked Withers to please discuss with him any

recommendations she is considering before taking those

recommendations to the board.

I M A E D U C AT I O N A L C A S E J O U R N A L V O L . 8 , N O . 4 , A R T. 2 , D E C E M B E R 2 0 1 51

ISSN 1940-204X

Trust May Breed Trouble: Fraud Opportunities and Ethics at Saintly Church

Cecily Raiborn, Ph.D., CMA, CPA, CFE McCoy Endowed Chair in Accounting Texas State University

Janet B. Butler, Ph.D., CGMA, CITP Professor of Accounting Texas State University

Nathan H. Cannon, Ph.D., CPA Assistant Professor of Accounting Texas State University

Randall F. Young, Ph.D. Assistant Professor of Accounting Texas State University

© 2 0 1 5 I M A

Figure 1: Susceptibility for Fraud and Abuse in Not-for-Profit Organizations

Not-for-profit organizations often:

• Place excessive control in their founder, executive

director, or substantial contributor;

• Allocate limited resources to accounting, internal

controls, and financial oversight;

• Have many volunteers working in the organization

who are privy to confidential information;

• Have boards of directors comprising only volunteers,

with little or no financial oversight expertise;

• Have nonreciprocal transactions, such as charitable

contributions, that are easier to steal than other

sources of revenue where there is consideration

exchanged; and

• Are highly susceptible to the effects of negative

publicity and, therefore, are reluctant to report, or

even discuss, fraud when it occurs.

Source: B. Collins, “Not-for-Profits Not Immune to Fraud,” EisnerAmper Accountants & Advisors, May 16, 2014, http://www.eisneramper.com/non-profits-fraud-0410.aspx.

THE CHURCH

Saintly Church was formed about 20 years ago in a small

suburb of a metropolitan area. As the city grew, so did the

suburb and the church. A large proportion, but definitely not

all, of the members would be classified as having middle-

to-high income. To meet the needs of its membership and

others in the community, the church operates Little Saints

Daycare five days a week. Church operating funds are raised

from the Little Saints Daycare tuition, collection plate

donations, online donations through Secure Spirits (the

church denomination’s giving website), and a monthly bingo

game. The church also has two large community rooms that

may be rented out for nonchurch events. The community

rooms are constantly under renovation to make them more

attractive for rental activities.

In addition to a small petty cash fund in the church

secretary’s desk drawer, a larger cash “benevolent fund” is

available to pay for food for the occasional homeless person

or to provide less-affluent church members with financial

assistance for small emergencies. If there is insufficient cash

in the benevolent fund to help someone in need, the pastor

can ask the governing board for additional money.

THE PEOPLE

Pastor Lang has been with the church for three years, having

moved halfway across the country just prior to taking the

position. He showed up at the right time. The previous

pastor retired and moved to Florida a year previously, and

the church had just finished its discernment and transition

process, which generated recommendations for interview

candidates and sought to preserve continuity between the

leaving and incoming pastors. After wowing the governing

board in his interview, Lang (with an undergraduate degree

in accounting and graduate degree in theology) passed his

background check and was hired. In addition to his salary

and a credit card to be used for church business, Lang is

provided with a housing and car allowance. He was slightly

disappointed by the salary offered, but stated that he could

manage on that amount since he is single and his accounting

major made him good at budgeting. His background has also

made him a favorite with some of the elderly parishioners

because he is able to help them with their finances.

Sabrina Louis, the church secretary, had been hired

eight years ago by the previous pastor. That pastor, being

concerned about privacy issues related to congregants’

contributions, made Louis solely responsible for counting

collection plate offerings rather than the more typical

approach of having rotating teams of congregation members

perform that task. Over the years, Louis has been given

more and more responsibilities. Today she is in charge of

much of the bookkeeping, including recording contributions

and pledges, preparing financial statements, and making

purchases authorized by Lang or, in the case of purchases

more than $2,000, by the board. Because of her multiple

job duties and her dedication to the church, Louis tends

to work long hours and takes few vacation days. She says

that vacations aren’t really important to her since she is not

married and few family members live close by.

GENERAL FINANCIAL PROCESSES

The church has a checking and savings account at a local

bank. Two tellers and one manager from the bank are church

members. Bank statements are sent to the church address

and are reconciled monthly by Lang. In addition to Lang,

one member of the governing board has authority to sign

checks for the church; only one signature is required on

a check. Lang typically makes bank deposits on Monday.

Cash and checks from the Sunday collection plate are stored

in a small safe that Lang, Louis, and one member of the

governing board have the combination for. Cash offerings

I M A E D U C AT I O N A L C A S E J O U R N A L V O L . 8 , N O . 4 , A R T. 2 , D E C E M B E R 2 0 1 52

have decreased significantly over the past few years since

many church members prefer to contribute by check or

online on a monthly basis.

Daycare tuition can be paid on a daily, weekly, or

monthly basis depending on how regularly a child attends.

Daily and weekly tuitions are generally paid by check,

but some people do pay in cash. Monthly tuition is billed

by Louis and remitted to her by check. The number of

people working at Little Saints Daycare varies based on

the number of children. Lang interviews and hires daycare

workers. There are three “regular” workers, and substitutes

are available to fill in when needed. One of the regular

workers provides Lang with information about the daily

number of children attending (and those who paid in cash)

as well as who worked and for how long. Lang reviews the

attendance records and forwards the attendance records and

any tuition payments to Louis. Louis records the tuition

payments received then sends the checks or cash to Lang to

deposit into the bank. Daycare employees’ timesheets are

also reviewed, and the information is given to Louis. She

writes the payroll checks, and Lang signs them. One of the

other regular workers is in charge of purchasing snack and

meal items for the daycare center and turns the receipts over

to Lang, who approves them and submits them to Louis to

provide payment.

Although Louis is in charge of checking the calendar

for availability of community rooms, Lang meets with

individuals wanting to rent the room. There is no set fee

for room rental. The amount Lang charges depends on

whether the person who wants to rent is a church member or

nonmember, what the purpose of the rental is, how long the

rental will be, and what (if any) church furniture or fixtures

will be used. Lang collects a deposit and tells Louis the

remaining amount to bill.

The monthly bingo game is scheduled on a Saturday night

and is a cash-only event. Both Lang and Louis sell the bingo

cards, and Lang pays out the winnings from the proceeds.

Volunteers call the games and help with the event. Lang uses

bingo proceeds to pay for the volunteers’ drinks and snacks

as a thank you for donating their time. The net cash is then

deposited into the bank on Monday along with the Sunday

offerings. Bingo proceeds have been declining substantially

although most church members still attend and socialize.

THE CIRCUMSTANCES

Three days after her discussion with Pastor Lang, Withers

gathered with the rest of the church’s governing board for

the monthly meeting. A major focal point of the meeting

was the financial statements provided by Louis.3 (Tables

1 and 2 present portions of the 2014 budget and excerpts

from the three-year Statement of Activities prepared for the

Board.) While they may not have been considered dismal, the

financials did not provide good news compared to the budget.

Offerings were lower than expected, as were tuition, rental,

and bingo revenue. Expenditures for benevolences, daycare

worker wages, daycare snacks and meals, and community

room improvements were higher than budgeted. The situation

has been getting worse over the last 18 months, and the board

members were concerned. One board member who had

recently become the victim of employee fraud at his business

remarked that things had financially gone downhill since Lang

had become pastor. The board member then mused aloud that

Lang could easily be stealing from the church. After all, had

the other board members seen Lang’s new car?

Table 1: 2014 Budget Excerpt

Unrestricted Revenues:

Contributions/Offerings $200,000

Daycare Tuition 155,000

Bingo Revenue 18,000

Building Use 5,500

Total Unrestricted Revenues $378,500

Expenses:

Pastor Compensation $ 80,000

Church Employees Compensation 75,500

Daycare:

Employee Wages 130,000

Snacks and Meals 13,000

Utilities and Miscellaneous 8,200 151,200

Maintenance & Utilities

(incl. Community Room)

30,000

Benevolences 18,500

Church Council 4,000

Youth Ministry 5,100

Worship and Music 4,300

Outreach and Advertising 1,000

Total Expenses $369,600

Excess of Revenues over Expenses $ 8,900

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The board members turned to Withers. Surely her

knowledge of accounting and budgeting could help them

understand what might be happening. Withers thought carefully

about everything that was going on. On one hand, logical

explanations could be given for all of the unfavorable variances

between the budget and actual amounts. On the other hand,

internal controls were weak, and the potential for fraud is high.

Given the IMA Statement of Ethical Professional Practice,

Withers knows that she has a responsibility to be honest, fair, and

objective in addressing the church’s financial issues with the rest

of the board members. A CMA has a competence responsibility

to “provide decision support information and recommendations

that are accurate, clear, concise, and timely.” Additionally, a CMA

has a credibility responsibility to “communicate information

fairly and objectively” and to “disclose all relevant information

that could reasonably be expected to influence [a] user’s

understanding of…analyses or recommendations.” Finally,

even though the church had no stated internal control policies,

Withers knew that she had a responsibility to disclose the control

problems that could lead to inappropriate behaviors.

CASE QUESTIONS

1. Who are the stakeholders of Saintly Church?

2. A system of internal controls should be designed to protect

assets and ensure compliance with organizational policies and

procedures. Do you believe that the church has a reasonable

system of internal controls? Explain why or why not.

3. Prepare a flowchart of the sources and uses of the church

funds. Indicate within the flowchart where documentation

is being prepared and by whom. Use this flowchart to

identify points of weakness in the current system of

internal controls for question 4.

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STATEMENT OF ACTIVITIES

FOR YEAR ENDED DECEMBER 31

2014 2013 2012

Contributions/Offerings $195,000 $198,000 $202,000

Auxiliary Service Revenue:

Daycare Tuition 150,000 154,000 158,000

Bingo Revenue 15,000 18,000 19,500

Building Use 5,000 5,300 5,800

Total Unrestricted Revenue $365,000 $375,300 $385,300

Pastor Compensation $80,000 $78,000 $77,000

Church Employees Compensation 75,000 74,500 74,000

Daycare:

Employee Wages $135,000 $130,000 $129,000

Snacks and Meals 15,000 14,500 14,000

Utilities and Miscellaneous 8,000 158,000 8,100 152,600 8,000 137,000

Maintenance & Utilities (incl. Community Room Improvements)

32,000

29,000

27,500

Benevolences 19,000 18,700 18,200

Church Council 4,000 3,900 3,900

Youth Ministry 5,000 5,100 5,000

Worship and Music 4,000 4,000 3,900

Outreach and Advertising 1,000 950 900

Total Expenses $378,000 $366,750 $347,400

Excess of Revenues over Expenses ($13,000) $8,550 $37,900

Table 2: Statement of Activities Excerpts for Three Years Table 2: Statement of Activities Excerpts for Three Years

4. Fraud, waste, and/or abuse may occur when an

organization has no, or ineffective, internal controls.

a. In what ways might Pastor Lang commit fraud in the

church? If the pastor is stealing from the church, what

rationalizations might he use for his actions?

b. In what ways might Sabrina Louis commit fraud in the

church?

c. What types of waste and abuse could be occurring

in the church by persons other than Pastor Lang or

Sabrina Louis?

d. What recommendations should Withers supply to the

board about the church’s internal controls?

5. Assuming that no theft is occurring at the church, discuss

the human resource issues that the lack of internal

controls places on church employees.

6. Organizational governance reflects the manner in which

management (in this case, the church’s board and pastor)

is directed, administered, and controlled toward the

achievement of mission and vision. It appears that the

appropriate level of governance is not being provided by

the board at Saintly Church. What legal and ethical issues

might arise related to the various stakeholders given the

lack of good organizational governance?

7. What rational and legitimate explanations could be given

for each of the line item budget variances?

8. Review the standards of competence, confidentiality,

integrity, and credibility within the IMA Statement of

Ethical Professional Practice.

a. How should Withers proceed relative to (1) the

situation and (2) her communications with the board

and others?

b. Given the responsibility of confidentiality, how should

Withers broach the subject (if at all) of the potential

for Louis committing fraud?

ENDNOTES

1 See, for example, http://www.kybaptist.org/wp-content/

uploads/2012/06/27-Handling-Money-in-Church-Internal-

Controls.pdf , http://download.elca.org/ELCA%20

Resource%20Repository/Internal_Control_Best_Practices.

pdf , http://www.churchmanagementsolutions.com/kb/

KnowledgebaseArticle50270.aspx.

2 Warren, R., “How to Build Trust Within Your Staff,” Pastors.com

(September 3, 2012); http://pastors.com/how-to-build-trust-

within-your-staff/.

3 Churches are not-for-profit organizations. Not-for-profit

entities typically use fund accounting rules and principles

and prepare financial statements in accordance with FASB

Statement of Financial Accounting Standards (SFAS) Nos.

116 and 117. At the time this case was written, SFAS 117 was

under review. See http://www.fasb.org/cs/ContentServer?c=F

ASBContent_C&pagename=FASB%2FFASBContent_C%2F

ProjectUpdatePage&cid=1176159286112 for an update of the

current status of this standard and the review process.

I M A E D U C AT I O N A L C A S E J O U R N A L V O L . 8 , N O . 4 , A R T. 2 , D E C E M B E R 2 0 1 55

ABOUT IMA® (Institute of Management Accountants) IMA®, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA® (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 75,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/Africa. For more information about IMA, please visit www.imanet.org