Stealing from the Collection Plate: Fraud in Churches and Religious Groups

Churches and religious groups are at a greater risk for financial misconduct because of the nature of their missions and management structures. Here's how fraud examiners can help deter theft and the loss of a congregation's trust. 

Several of the students complained to the CCS's board of directors and an investigation began into Rev. Soames' activities. The inquiry subsequently uncovered missing funds, a second bank account into which he was funneling money, and child pornography on his personal computer. The unusual thing about this case is that the board only first examined the pastor's professional behavior (particular his handling of money) when his personal life strayed out of bounds despite the group's many questionable financial practices. And it seems likely, as long as he behaved himself publicly, that Rev. Soames would never have been investigated and would have run CCS into financial oblivion.

None of the CCS board members were lazy or uncaring about the group and certainly none of them were dishonest. Nor were the instances of financial misconduct particularly subtle. A subsequent examination of CCS's financial records, which were in considerable disarray, easily uncovered duplicate paychecks, large expense reimbursements checks with no documentation, and numerous other problems. So how then do situations like that in CCS arise and how do fraud examiners deal with them?

Why religious groups are vulnerable to fraud
While there's no evidence that fraud occurs more often in religious groups, there's reason to believe that they are at a greater risk for financial misconduct because of the nature of their missions and their management structures. The problems that fraud examiners face with religious groups are involved less with designing fraud prevention systems or in detecting existing fraud. Rather, the difficulty is in dealing with the culture of religious groups that predisposes them to the risks of fraud. As with many groups, the struggle is to change or work around organizational behaviors that increase fraud risk rather than design anti-fraud programs.

Fraud examiners who deal with churches, synagogues, mosques, or other religious groups either at a professional level or as members, should be aware of the following factors which may predispose them to fraud.
Religious groups are lucrative targets for fraud.

Rev. Soames was by no means an isolated case, and, if anything, was rather modest compared to those frauds which have made it to the national press. For example:

• A former employee of the Wisconsin Conference of the United Methodist Church was sentenced to two years in prison for embezzling more than $158,000 from the organization. 2 
• A New Hampshire man was sentenced to 46 months' incarceration for embezzling more than $1.6 million from the Portsmouth, N.H. Church of Christ Scientist. 3 
• The president of the National Baptist Convention looted millions from the organization to finance a lifestyle of waterfront homes, expensive cars, and large diamonds. 4 
• Part of the difficulty in fraud prevention is simply getting the group to believe they're at risk. Religious groups often feel as though they're strapped for cash; however, the median church budget in the U.S. was $203,590 per year in 2000.5 While this is a relatively modest budget on which to run an organization, it's large enough to be tempting to fraudsters. Moreover, many religious groups collect the bulk of their operating funds in cash during the weekly offering, which makes them even easier to steal.

The organizational culture of religious groups leads them to believe that their religious purposes are sufficient to protect them against financial misconduct.

This might be termed the law of sympathetic magic, and is often shared by groups who are engaged in a charitable purpose. Basically, the argument runs, "Who would steal from God?" There is, perhaps, some validity to the argument, since members of religious groups are apt to share common values. Unfortunately, as countless case histories have demonstrated, fraudsters are able to rationalize even the most heinous financial crimes. Again, the real difficulty with many religious groups is simply getting them to acknowledge that they're at risk, and that their religious purposes are insufficient protections against fraud.

Relgious groups are founded on a culture of trust.
The nature of religions is to be both trusting and to forgive transgressors. This creates a two-fold problem in the context of fraud prevention. The first problem is that many religious groups feel it goes against their principles to treat members as potential fraudsters. Thus, anyone attempting to make the case for better fraud protection has a philosophical bias against them as well as the normal impediments fraud examiners face.

Second, in those cases in which fraud does occur, the group may be even more reluctant than other entities to prosecute because of religious conviction.

Daily financial management is frequently under the control of a single individual who isn't subject to the financial controls and oversight normally found in profit-making entities.

In most religious entities, financial matters are supervised either by the board treasurer or head leader (pastor, rabbi, etc).6 This is a situation in which there's essentially no segregation of duties for the financial functions. Ostensibly, the board of trustees should provide oversight. However, often board members are unaware of this role and fail to exercise it. Even in those cases in which board members are aware of their duties, they often feel uncomfortable criticizing the actions of their clergy.

The audit profession can also fail to notice this weakness during audits. Nonprofits frequently resemble sole proprietorships in which the owner apparently compensates by dealing himself with the material control weaknesses. Unfortunately, clergy and treasurers aren't the owners of their religious groups and their personal intervention doesn't guarantee that they will prevent embezzlement.

Governing boards often are composed of volunteers.

Volunteer boards don't necessarily provide poor financial oversight. However, there are conditions that occur more frequently in volunteer management boards, which make frauds significantly easier to commit and harder to detect.

• Board members often don't know that they are financial overseers. A common remark from board members in all types of nonprofit fraud is, "We didn't realize we needed to provide oversight." 7 While this response may be an attempt in some cases for board members to absolve themselves of responsibility, usually they believe this because they receive little or no orientation in their duties.
• Board members often aren't independent. Filling board positions can be a difficult task in any organization. So the jobs are frequently taken by friends and family of the clergy or other board members. While this doesn't necessarily guarantee poor administration, it can create a climate in which there's less rigorous oversight.
• Board members often have little or no financial background, which contributes to boards' unawareness of their financial oversight duties. Board members are chosen from a restricted population and serve for a variety of reasons. Often none of them have any accounting expertise. This increases the likelihood that the board won't be aware of the need for independent financial oversight or won't be able to provide it if they do recognize the need. (See next section.)
• Turnover among board members can be high because most have full-time jobs and families. The potential for exhaustion is high, particularly among members who volunteer professional expertise such as lawyers or accountants. High turnover not only depletes expertise but reduces corporate memory. At any given time, boards might lack members who recall the church's financial history or its past policies for financial accountability.

Groups often lack independent audits or outside accountability.
Religious groups vary widely on the requirements of accountability - from audits on the regional level, to individual entity audits, to no audits at all. The reasons for the lack of accountability to national organizations frequently have their roots in theology or group history so it may cause problems to increase centralized oversight. Similarly, independent audits may be too expensive for some.

Rendering unto Caesar: making the case for better financial control in churches
The specific controls that most religious groups need to protect themselves from fraud tend to be simple. Consistent record keeping, segregation of duties, and independent oversight by the board of trustees were among the classic internal controls that would have prevented the abuse that occurred at CCS. Indeed, the problems have less to do with diagnosing risk and creating fraud prevention programs than with convincing church members and leaders to make financial controls a big enough priority to institute them. The following is a series of issues fraud examiners can discuss with members of religious groups to encourage them to place a higher priority on financial management and to better educate their members on how to protect the groups' resources.
Good financial management isn't antithetical to religion.

It's easy to see why religious groups might place a lower emphasis on financial matters. The Bible, for example, contains well-known admonitions against the misplaced desire for money. The New Testament has a number of equally compelling arguments in favor of good financial stewardship. Among the 37 parables, for example, 17 are concerned with money. Most notable among these is the parable of the talents in which the servants who increase the value of their master's holdings are rewarded not just for being honest and returning the money but for having used it wisely to increase its value. We find similar sentiments in the writings of Judaism, Islam, Buddhism, and other faiths.

Obviously, the point here isn't to venture into theology but to demonstrate that most religions encourage the concept of financial management for greater good of their congregations. Therefore, attention to financial matters doesn't have to be antithetical to religious duties at all but should be a necessity.

Boards are only as useful as their training allows them to be.
A cornerstone of fraud prevention is that controls are no more effective than the people who use them. As we've seen earlier, a major difficulty for the boards of religious groups and other nonprofit boards is that they're simply unaware of their financial duties. Research, in fact, has indicated that a major difference between nonprofit organizations which experience fraud and those that haven't is whether their boards receive training in their oversight duties. 8 

The difficulty is that fraud prevention and internal control are management functions. The best fraud prevention schemes are of limited value unless the individuals who run the group (that is, the board members) understand their roles in making them work effectively and consistently. Training prepares board members as stewards of the congregation's assets; once board members become aware of their duties, they're more likely to suggest internal controls or require that existing ones be used.

Many denominations offer formal workshops as well as instructional materials for board members. (See the bibliography for examples.) More generally, the National Center for Nonprofit Boards (www.ncnb.org/) can provide generic training materials suitable for board members of any organization.

Congregations need to be an active part of fraud prevention.
Congregations can act as financial watchdogs in much the same way that boards do. Secrecy breeds fraud in church finances. Public disclosure of the organization's finances (for example, a yearly publication of financial statements for the congregation's review) is a powerful deterrent to numerous types of fraud. Although more sophisticated frauds may still be perpetrated, a simple set of financial records can prevent blatant instances of financial misconduct such as using the group's funds for resort travel and luxury cars. Moreover, the regular presentation of finances to the congregation helps foster a climate of financial accountability which deters not only fraud but wasteful and inefficient spending in general.

Full audits may not always be necessary
Audits bring the highest level of independent oversight; however, they can be both disruptive and costly. In many instances, religious groups aren't sufficiently complex or solvent to require a full audit. An independent accountant's periodic review of the statements can be more than sufficient especially if it's coupled with regular, involved oversight by the board of trustees and members of the congregation.

At some point, however, the organization may grow to such a size that regular audits are necessary. Many religious groups are now multi-million dollar enterprises, and have clearly entered the realm of big businesses with mandatory concomitantly sophisticated oversight.

A number of accounting firms, which specialize in financial matters for both churches, synagogues and mosques, can be located through the governing bodies of religious groups or Internet searches using "church audits," "synagogue audits," "mosque audits" or related search words. Examples of audit guides and audit programs for churches are available free of charge at the Auditnet Web site.

The aftermath: regaining a community's trust
As a result of the CCS board's inquiries, Soames was charged with a variety of crimes and defrocked as a minister. At publication, charges are still pending. Since the original incident, CCS was without full-time clergy for more than a year. In the interim, most of the sponsoring organizations withheld their contributions pending the appointment of a new board of trustees and evidence of effective financial oversight. As of mid-2005, a new CCS board had been appointed including one member who's both an ordained minister and a CPA. What hasn't been reconstituted, however, is CCS's good reputation. "The biggest difficulty we have to overcome now is regaining the trust of our supporters," said one of the new board members. "It's not as though we can increase sales to generate new revenue. The trust of our sponsors is all we have."

Preventing fraud is a major concern for all fraud examiners, but it takes on even more importance for religious groups. When groups operate based on faith and trust, they have very little to fall back if these are missing. CCS lost relatively little money in absolute terms, but the loss of its reputation has done incalculable damage and it may be years (if ever) before its sponsors fully trust them again. Unfortunately, trust is more easily lost than replaced and organizations are better served by protecting it than by winning it back.

Herbert Snyder, Ph.D, CFE, is an associate professor of accounting at North Dakota State University in Fargo. James Clifton, MA, CPA, CFE, is senior lecturer at North Dakota State University in Fargo.

The authors would like to thank the Rev. Nancy Emerson of the First Presbyterian Church of Moorhead, Minn., for her invaluable help in preparing this article. 

1 CCS is a real organization. The example actually occurred although the names and other details of the situation have been altered.
2 Miller, M. (March 4, 2004). "2-Year Sentence for Church Fraud; Former Employee Embezzled $158,000." Madison Capital Times. p. 4B
3 Staff. (July 22, 2003). "Man sentenced in church embezzlement." Boston Globe. p. B2
4 Anonymous. (1999). "United States: A collection for what?" The Economist. 350(8106). p. 30.
5 Ten-Elshof, P. (2000). "Church Budgets: You Are What You Spend." Christianity Today online
6 Bushy, D. (1999). "Safeguard the church treasury." Christianity Today online
7 Snyder, H. and Hersberger, J. (1997). "Public libraries and embezzlement: An examination of internal control and financial misconduct." Library Quarterly. January, 1997. pp. 1-23.
8 Snyder, H. and Dietz, D. 2005. "Fraud in Community Health Centers." Journal of Forensic Accounting (Forthcoming, December, 2005)

Additional reference materials for church fraud and audits:
Marino, F. (2003). "Handbook for the Church Audit Committee." Commission for Leadership Development Massachusetts Conference, United Church of Christ: Framingham, Mass. Available at: http://www.macucc.org/stewardship/audit.pdf (9/12/2005).

Staff. (2001). "Where does the money go? Budgets, debt & salaries in today's churches." Christianity Today International: Carol Stream, Ill.

Belton., D. (2001). "The Local Church Audit Guide." United Methodist Church: Nashville, Tenn. (9/12/2005)