How do you handle embezzlement?

[gospeltab]

Sadly, our former treasurer embezzled funds from the church. It was prior to purchasing Power Church (part of the reason we now have this software!) We are running version 11.

How should I enter this information into our current system? He is going to begin making restitution and I am not sure how to track this. Any help would be greatly appreciate.

Thanks!
Deanne

[JohnDMeyers]

One way is to create a negative asset, like "Lost Funds" and give it an initial value:

Initial setup
CR 01-1910-000 Lost Funds $1000
DB 01-3110-000 Lost Funds $1000

That properly records the loss of funds on your books.

I can think of two ways to receive the funds that come in as restitution. A CPA may have better ideas, but this is a practical solution:

As payments are received:
DB 01-1110-000 checking
CR 01-4910-000 Recovery of Lost Funds

or

DB 01-1110-000 checking
CR 01-2910-000 Receipt of Lost Funds

The second way creates a negative liability to offset the negative asset. At the end of each year, you can apply the offsetting amount from either the income account in the first solution, or the negative liability in the second solution to reduce the negative asset.

Reasoning: A positive liability is money that your church owes to someone. A negative liability is money that someone owes the church.

End of year adjustment
DB 01-1910-000 $amount that came in
CR 01-2910-000 $amount that came in

Sorry that this looks ugly on your books, but hopefully, in time, it will disappear.

[gospeltab]

Thank you for your first reply...now I have a few more questions.
Our church board made a final decision on how to handle the whole situation with our former treasurer.

He took approximately $35,000 from 2007 - 2009. In the spring of 2009 he deposited $7300 back into the church checkbook. We recently got a check for $10,000 and he must pay back an additional $5,000 by December 31 of this year or pay interest on whatever of that $5000 has not been paid in full. The church is going to forgive approximately $12,000 but issue a 1099 to him as wages (he wanted to do it as a volunteer position so did not receive a salary during his time as treasurer.)

If I create a "Lost Funds" account as you first suggested and have it debit the unrestricted net assets, won't that skew my totals? We started power church 11 in January 2010 and all of the problems happened prior.
I would like to accurately track the numbers, but not sure what to do about the deposit that was made in 2009 that went directly into the checkbook and was spent. Also not sure how to track the money that they church is going to forgive...

Should I just enter the amount of stolen funds that were left after he paid back the $7300?

I am just having trouble wrapping my brain around how to best track this in the system...

Thanks in advance for any additional help!

[JohnDMeyers]

Think of "Net Assets" as the equivalent of "Cummulitive Net Profits" in a business.

If someone steals $35,000 in 2009 from your "Cummulitive Net Profits", but you don't know it, and then in 2010 when you do find out about it, it is not improper to decrease the total of your "Cummulitive Net Profits" in 2010.

Said another way, $35,000 is gone from your "Cummulitive Net Profits" and you need to decrease your "Commuilitive Net Profits" until it is recovered.

I would make the original entry for $27,700 and date it on Jan 1, 2010 (to represent the starting the balance for the year), to show that things had happened in 2009, but were accounted for until 2010.

I would set up an asset and liability and keep negative balances in both until things are paid. That way, you are not hurting the income and expense reporting.

(initial entry)
CR 01-1910-000 Lost Funds $27,700 Jan 1. (post it in your current month)
DB 01-3110-000 Lost Funds $27,700 Jan 1. (post it in your current month)

(receipt of each payment)
DB 01-1110-000 checking $10,000 (date it was received)
CR 01-2910-000 Receipt of Lost Funds $10,000 (date it was received)
(repeat the above transaction as money comes in)

(forgiven amount)
DB 01-5990-000 paid retribution work $12,000
CR 01-2910-000 Receipt of Lost Funds $12,000

(end of year)
DB 01-1910-000 Lost Funds ($amt in 01-2910-000)
CR 01-2910-000 Receipt of Lost Funds ($amt in 01-2910-000)

Note: By using an expense account in the (forgiven amount), you are "permanently" decreasing the net assets by $12,000, which is correct for the information you indicated here.