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Embezzlement Without Internal Controls

North Carolina
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Key point 7-21. Embezzlement refers to the wrongful conversion of funds that are lawfully in one's possession. Embezzlement is a common occurrence in churches because of weak internal controls.

A North Carolina court upheld the conviction of a woman who embezzled funds from the church and a school district office where she worked as a bookkeeper.

In 2008, a woman (the "defendant") began work as a secretary for a public school district. Her responsibilities included purchasing food and non-food items for school meetings, training sessions, and programs. Purchases were typically conducted with a school district credit card. The school district also reimbursed employees, such as the defendant, for purchases made using personal funds and for any mileage expenses incurred.

Also beginning in 2008, defendant worked as the bookkeeper for a church. As church bookkeeper, she was responsible for paying the church's bills, keeping all financial records, and providing the church with quarterly financial reports.

In 2010, after noticing irregularities in the church's finances, the pastor contacted the local sheriff's office. A police investigation and audit revealed that defendant had used the church's checking account to pay personal debts. Defendant subsequently apologized to the church and repaid the misappropriated funds.

The school district was notified of the police investigation into defendant's misappropriation of funds from the church. Shortly thereafter, defendant's supervisor discovered her name had been forged on reimbursement forms submitted by defendant to the school district. After a police investigation of purchases defendant made using the school district credit card, she was arrested for embezzlement of school funds.

In 2011, a grand jury indicted defendant on one count of embezzlement. A jury convicted her of embezzlement. The defendant appealed, claiming that the state failed to prove embezzlement. Specifically, defendant argued that the state failed to offer substantial evidence that defendant used the school system's property for a wrongful purpose.

A state statute defines the offense of embezzlement and requires the state to present proof of the following essential elements: (1) the defendant acted as an agent or fiduciary for his principal, (2) he received money or valuable property of his principal in the course of his employment and by virtue of his fiduciary relationship, and (3) he fraudulently or knowingly misapplied or converted to his own use such money or valuable property of his principal.

The court noted that the defendant had forged signatures in obtaining payment for several items, and this "presents sufficient evidence by which a jury could infer defendant's intent to commit embezzlement."

The defendant also claimed that the trial court improperly allowed the state to present evidence of her embezzlement of funds at the church. The court cited a state law that provides, in part: "Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show that he acted in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake, entrapment or accident."

The appeals court concluded that it was proper for the trial court to admit evidence of the defendant's embezzlement of church funds under this exception, to show motive, intent, and common plan or scheme. The court noted, "the misappropriation of church funds occurred about the same time as the embezzlement of school funds; defendant held a similar position of trust in each setting which allowed her access to funds—checking account for the church, credit cards for the school; and she abused that position of trust through the unauthorized use of funds and property. The only distinction is that defendant admitted to the misappropriation of the church funds and was allowed to repay the money."

What this means for churches

This case is relevant to church leaders for the following reasons:

1. Many church leaders consider embezzlement to be a problem that "couldn't happen here." Yet, it is this very attitude that contributes to poor or nonexistent internal controls over cash handling and payment of expenses that makes embezzlement a real threat.

2. How was the defendant able to embezzle church and school funds? In most cases, by forging signatures on checks. Had the church implemented the most basic internal controls, she could not have engaged in her acts of embezzlement. Here are two internal controls that would have worked:

  • Require at least two signatures for all checks above a nominal amount.
  • Have monthly bank statements reviewed by a church official or employee having no responsibility for handling cash or writing checks.

3. Church leaders may not be discharging their fiduciary duties when they fail to implement basic internal controls over cash handling and the payment of expenses. Such a failure can result in a host of negative consequences, including criminal liability to the embezzler.

4. The legal consequences of embezzlement can be severe. In this case, the defendant was convicted of a felony. State v. Parker, 756 S.E.2d 122 (N.C. App. 2014).

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Posted:
  • February 20, 2015

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