Newsletter from
Steve Richardson & Company, Certified Public Accountants
March 24, 2020
Credit Card Fraud
To Our Clients and Friends:
Credit Card Fraud?
I’m not talking about when a thief steals your credit card information to make bogus purchases. That credit card fraud is obvious and, by now, most of us know how to deal with this nuisance, and, this is all it is, an annoyance.
Real damage can be done when businesses, and, especially, churches and non-profit organizations, misuse credit cards. Credit card fraud is common in small business; it is more common and more explosively dangerous in the not-for-profit and church industry. Credit card fraud in not-for-profit organization and churches always ends badly!
I saved Air Miles for the end; keep reading.
The irony of this fraud is that most of the people guilty of credit card fraud do not believe that what they are doing is wrong; at least they do not believe it until the sharp light of inquiry is shining on the transactions. I’ve seen really good people make very bad, career ending, mistakes with credit cards.
Small business credit card fraud
Our firm has a ‘Firm Credit Card’. We need it because much of our software is big dollar, online, fee based downloads. Many small businesses have a ‘business credit card’ for similar reasons.
This past week, I “borrowed” the ‘Firm Credit Card’ from its’ custodian, my associate Todd Cowart. Todd is our custodian because, frankly, I trust Todd more than I trust me. We have sort of have a co-custodian of the card, Gina Allen who, like Todd, is morally and ethically above reproach. Gina Allen is a financial secretary and bookkeeper; Todd is our Chief of Operations. Good people to have.
A two trustee custodian system works very well for our firm. It creates two sets of honest eyes looking at each transaction. Because of this co-trustee system, I (who am the owner of the company by-the-way) turn in my out-of-pocket expenses on an expense reimbursement form. I never use the ‘Firm Credit Card’ for my legitimate out-of-pocket expenses of my business. This co-trustee system has the effect of keeping me honest (and it keeps me away from the ‘Firm Credit Card’ as it was intended to. A good CPA must be an honest CPA. Todd, Gina and the co-trustee credit card management system help keep me honest.
If I had the ‘Firm Credit Card’ in my hot little hand, I would be trying hard to twist every transaction into a tax deduction. That is a “Credit Card Fraud” at its most common.
As a CPA Firm, we actively discourage our clients from having business credit cards and, instead, to rely solely on expense reimbursement forms. The realities of the modern economy are making that increasingly more difficult.
The most common small business credit card frauds are:
- Co-mingling legitimate business expenses and personal expenses.
- Making an effort to disguise personal expenses as tax deductible business expenses
- Failing to create the required IRS documentation for the legitimate business expenses potentially rendering them not-tax-deductible.
- Even legitimate business expenses are not tax deductible without proper documentation.
Not-for-profit and church credit card fraud
All of the above mentioned credit card problems exist in the church and not-for-profit industry amplified! What will get you a slap on the hand in a small business credit card fraud could get you jail time in the non-profit sector.
We do a lot of work for churches, church organizations and other not-for-profit organizations; I’ll call this group ‘non-profits). Credit card fraud in these organizations is, in our experience, actually more common than in the business use of credit cards.
More Common in Churches!?
When doing our audits and reviews we continue to turn up credit card fraud over-and-over again. At first, I thought we were having bad luck.
The problem credit card fraud grew so bad that I consulted with an elder CPA more experience in the non-profit sector. He told me that credit card fraud is much more common in this sector than in for-profit-businesses.
The reasons are as complex as human psychology. For example:
- To take air miles for personal use from the credit card is not really doing anything wrong.
- I started this organization; I put heart and soul and sweat into this organization. I’ve missed paychecks. The church owes me.
- My family’s expenses on this business trip are a normal part of doing business.
We have heard odd things:
- I’m trying to adopt a child and I’ve run out of money
- My own credit cards are going to bury me
- My wife is going to leave me
- I’m going to lose my house
But, by far, the number one reason that credit cards are abused is simple:
- I saw and opportunity; I thought I could get away with it so I did it.
- Ok; I guess two reasons. The other reason is greed.
Protection!
Generally I avoid clichés but there is one I like:
“Good locks keep honest people honest.”
The simple fact is that given enough opportunity and temptation, most people’s honesty will crumble. So, do what I do; I avoid temptation.
Education
Education is an important part of maintaining personal integrity and operational controls over the assets of the organization. Education takes two parts:
- Self-education
- Staff-education
Self-education
Only the most pompous believe that they know right from wrong well enough to void the need for constant reinforcement. With constant self-education, your ethics and morality are more likely to standup under sudden, intense and unexpected pressure. Even then, it will be difficult.
Imagine explaining your behavior to a judge, or worse, to your presbyters/board of directors or church members. In that harsh light, what are you allowed to do?
There is a two part standard:
- Maintain the highest level of integrity
- At all times, maintain the appearance of integrity
Staff-education
Secretaries and bookkeepers
Todd and I have had more success in stopping credit card fraud by staff training. Most financial secretaries and bookkeepers are unaware of the fact that if they fail to report a credit card fraud or otherwise assist in hiding such transactions, that they could also be held legally responsible.
Gina Allen, our financial secretary and bookkeeper is well educated; she knows what looks normal and what looks ‘fishy’. And! She is not at all inhibited about asking questions and seeking clarification. If she is not 100% happy with her research, she takes her concerns to the highest management level necessary to gain clarity. In our firm, that would be Todd. Only on the very rarest of occasions would that discussion ever get to me.
Other Staff
We have fine young people on our staff. On a routine basis, we pose ethical puzzles and ask them to think through to a conclusion.
Management
In the CPA world of accounting and auditing, there is a principle that the integrity of an organization starts at the top. If management is corrupt, mildly corrupt or honest, it colors the operations and culture of the entire organization. If management is corrupt, they can and often corrupt their subordinates. I’ve personally seen that happen to organizations both large and small.
The co-trustee system
With good internal education, the co-trustee system as described would work for most organizations. A well-educated financial secretary or bookkeeper will know what to look for and how to address problems should they arise.
The co-trustee system may not work for everyone due to a failure of education, fear of reprisal, or a culture that does not encourage honesty. Or, it could be simply a lack of adequate staff; you need people to have a co-trustee system. There must be some form of internal oversight and audit.
We can help design such a system to fit your needs.
Air Miles
I used almost all of the accumulated air miles on our ‘Firm’s Credit Card’ to purchase airfare for my son’s June graduation in Michigan. That got me to thinking! This is a serious discussion point.
Air Miles as Taxable Income
At times, the IRS has concluded that air miles should be taxable income. Later, saner heads prevailed and the IRS backed off of that position. One reason that the IRS changed their mind was the daunting task of enforcing a tax on air miles. Also, US Senators use a lot of Air Miles.
The current tax rules are ‘air miles earned on a credit card are not taxable income’. Good!
Well good for small businesses.
The use of credit card air miles in an owner operated business enterprise is acceptable, normal, customary and not-taxable. Not so in the non-profit world.
Air Miles in the Non-Profit sector
The rules for honest practice in using air miles are different for owner operated business enterprises and non-profit organizations.
By definition, the officers and pastors of non-profit organization are not owners. As non-owners, they are not entitled to the perks of ownership. I, as owner of my CPA Firm, get to use my air miles. The pastor of a church, unless he is on documented church business, is not entitled to use air miles earned on the church’s credit card. Fair or not, this is the law.
What is documented church business; or, better yet, what is appropriate documentation? This is a matter of education and practice.
Should the pastor or officer of a non-profit organization ever use the organizations air miles to pay for a spouse or other family member’s airfare? I strongly recommend against this for many reasons. If family members are the beneficiaries of such airfare the authorizations required from the appropriate organizational committee, board or other authority needs to be extremely well documented. Even then, with all i’s dotted and t’s crossed; expect organizational and political trouble.
Are these rules hard, fast and unchangeable? No; with the authorization of the church’s finance committee or other authorities within the church, the pastor or other church officer can have the advantage of credit card earned air miles.
The keys to the proper use of a non-profit credit card are:
- Open, honest and transparent transactions that are authorized, in advance, by an appropriate authority.
- Accountability
- A co-trustee system
- An empowered, educated financial secretary and/or a bookkeeper
- A reporting system to top management
- A reporting system to the appropriate organizational committee, board or other authority
- Maintain the highest level of personal integrity!
- Be open and willing to shine the brightest light on all of the organization’s credit card transactions.
- As bright as your light shines, other, less friendly lights, will be brighter.
A Case History
I was called in by a pastor to “do an audit” to prove that he was “honest”. Immediately red flags go up. I never did an audit. I did just a bit of consulting to help this pastor.
The issue was his alleged abuse of the church’s credit card. I looked at the credit card transactions; there was no fraud. There was a lack of documentation and a lack of oversight by the church. The records were messy. I wrote my report accordingly. The pastor approved of my report.
Before I delivered my report to the ‘deacons’, I told the pastor that he was going to get fired. He was flabbergasted.
I told him that the lack of church oversight alone created an ‘appearance of impropriety’. That appearance alone would be enough to cause the church to fire him and they did.
- Messy records
- A lack of documentation
- A lack of administrative oversight
That’s all it took for the pastor to lose his church.