We have this rich uncle…

The Case
 
Start with two administrators of a private catholic school. Add a gambling addiction. What could possibly go wrong?
 
The two Sisters were principal and vice-principal of a catholic school. They were responsible for taking in checks and depositing them at the bank. Some checks made it there, and some made it to other, private accounts. Those private accounts financed trips to Las Vegas where the two enjoyed gambling. Their story? They had a rich uncle who bankrolled their trips and their gambling.
 
When they were about to retire. the diocese conducted an audit. As the audit began, the principal exhibited signs of anxiety. She even asked some staff to falsify some records for her. The audit discovered bookkeeping irregularities. A forensic accountant later estimated that the two stole about a half a million dollars. Nobody noticed the loss because the school had been doing fairly well financially.
 
The diocese chose not to prosecute, and has removed the two from public service. They also placed church sanctions on them and the two have promised to repay the stolen funds. It was not stated in the reports how they planned to do this. Some parents were upset at the lack of prosecution. Link Link2
 
Analysis
 
Collusion is when two or more people act together to commit a crime. While there were two who were working together, it wasn’t clear that their collusion was a key part to this fraud. Sometimes, internal controls are insufficient. Here, it is likely that there were informal check-handling procedures. This would permit siphoning of checks to other accounts. 
 
One way checks wander is when a donor gives a check to “St James” instead of “St James Catholic School.” All you would have to do is form a  bogus ministry of “St James Charities” or some such, and open a bank account in that name. Any school checks made out to “St James” would go into your pocket for deposit into your private account. Checks made out with the complete name would go to the school.
 
This case also illustrates the role addictions play in embezzlement. These two evidently had a bit of a gambling problem – to the tune of a half-million dollars. Other addictions can also contribute to church theft. The “Fraud Triangle” helps us understand this. All frauds have the three elements of pressure, opportunity, and rationalization. Pressure is often described in fraud circles as “unshareable financial pressure”. The Sisters likely felt that confessing to a gambling addition would destroy their lives. You can imagine this being the case, too, with pastors in the midst of sex, drug, or alcohol addictions. Your job as pastor is to provide your flock with an environment of support. People need a place where they CAN share their struggles, and you need to make it clear that you will help. That help may involve giving them duties OTHER than financial duties, of course, but that, too, is help! 
 
How To Prevent This At Your Church
 
Fraud TriangleThe Fraud Triangle outlines the three key parts of all frauds. These are Pressure, Opportunity, and Rationalization. We discussed Pressure, above. Rationalization is where the individual convinces himself that this really ISN’T crime. Instead, they’re just making up for their being underpaid, for example. But that’s inside someone’s head. You can preach good sermons on telling oneself the truth and calling sin what it is – but that’s about as far as you can go.
 
The only real place you can prevent fraud is in the realm of Opportunity. Your job is to make it very, very difficult for someone to steal from the church. This keeps the church money were it belongs, removes temptations, protects reputations. It also keeps the church out of ugly church-splitting conflicts. These are all good things to do. Here are some suggestions about this particular case:
 
  • Keep an eye out for red flags: when people live beyond their means, they may be doing so with church money.
  • Listen for reports from the members. Having a hotline service might have allowed a parent, above, to report their concerns. Most fraud cases are discovered through tips. And if you print a hotline number in your church bulletin? Even visitors would know that your church values transparency and accountability. (Hotline services through Affordable Church Auditing is surprisingly inexpensive: email us for details).
  • Conduct periodic audits: these could be audits of internal controls, such as we offer. Or they could be having someone look at the books. A formal CPA audit may be out of reach financially. But those are used primarily by investors and financial gurus. You might swap bookkeepers with a sister church and let them look over your records.
  • Have one person log the arrival of all checks, and another process them for deposit. Each should report their work to an audit committee, who will ensure that things match.