Rufus Harvey, a veteran certified fraud examiner, recently conducted an investigation of a pastor who embezzled more than a million dollars over the course of several years. Ultimately, the perpetrator was caught and convicted and sent to prison. It was his controlling personality that allowed him to conceal his illicit activities from the church. People simply were too intimidated by him to challenge his words or actions. When the totality of the situation emerged and the church realized how badly they had been duped, the entire congregation and staff became demoralized. Ultimately, they disbanded. Fraud robs a church of much more than just money.
Churches can be deceived by a quiet and sneaky perpetrator, or intimidated by a demanding and controlling individual. When a church first discovers they’ve been embezzled, it goes through a “how could this happen to us?” phase. Once the initial shock wears off, leaders will try to determine the extent of the loss, the potential for recovering lost funds, and the steps to prevent a repeat of the fraud. All too often, churches decide to handle the investigation internally, turning to members who have accounting, finance, or other professional experience. Instead, churches should consider bringing in a certified fraud examiner (CFE).
Harvey says the CFE credential denotes proven expertise in fraud prevention, detection and deterrence. “CFEs are trained to identify the warning signs and red flags that indicate evidence of fraud and fraud risk,” he says.
To become a CFE, an individual must pass a rigorous test on the four major areas of fraud examination—fraud prevention and deterrence, fraudulent financial transactions, fraud investigation, and legal elements of fraud.
Advantages of a CFE
Why should a church use a CFE? In a word, objectivity.
“An allegation of fraud can raise a number of issues and problems for a church,” says Harvey. “The ability to handle an investigation with objectivity is imperative. It is often difficult for an organization ‘insider’ to remain objective as this type of tragedy unfolds. A CFE will come into a situation with no ties to anyone in the organization. The CFE will deal with the evidence he compiles impartially to ensure fairness to all concerned.”
In one case, Harvey was called into a church to investigate charges by the church board that the pastor had engaged in financial improprieties that resulted in his own personal enrichment. A thorough investigation vindicated the pastor and the church. “Not only had the pastor not taken anything from the church to augment his relatively modest salary package, but the accounting system and internal controls of this relatively small church would have been the envy of many larger churches.”
Harvey says it is rare for a fraud examination to lead to the exoneration of an alleged embezzler. But because a CFE maintains objectivity, it keeps the investigation from degenerating into a “witch hunt,” which potentially harms innocent parties and overlooks guilty ones.
What’s at stake with fraud
When the congregation and public at large learn there has been a misappropriation of funds, the church’s reputation may suffer. Its integrity will be called into question. The thorough, objective CFE investigation helps demonstrate that the church was a victim rather than a willing facilitator of dishonest practices.
When fraud occurs in a church, not only is the congregation and surrounding community interested in this news—so is the government. A breach in an organization’s financial integrity can mean that various tax laws have been violated. For instance, when fraud is committed by the nonpayment of payroll taxes, the IRS has powerful tools they will employ against anyone they consider “responsible” for the violation. The Internal Revenue Code (IRC) §6672 is one such draconian sanction the IRS will impose on church leaders, regardless if they had any knowledge of the theft. In extreme cases, the very legal existence and tax-exempt status of a church could be jeopardized if the IRS finds a church guilty of fraud.
Most church staffs and boards lack the expertise to conduct an effective fraud examination. Absent the specific training and experience in the field of fraud, the examination may be seriously flawed. This is especially important if the matter will eventually be tried in a court of law, where sloppy investigative work and poorly handled evidence will likely result in the acquittal of a guilty party, as well as exposing the church to a lawsuit by the perpetrator.
Although any seasoned fraud examiner will admit that intuition plays some role in any investigation, it takes formal training, seasoned with professional experience, to manage impressions, integrate data, formulate theories, and discover all the creative ways a fraudster has bilked the church. The evidence must be logically organized and clearly presented, while maintaining a careful chain of custody. Churches should heed the familiar warning: “Don’t try this at home.”
Challenges of using a CFE
The three primary challenges of using a CFE include:
1. Cost. Competent professionals come at a cost. The kind of examination necessary to perform a fraud audit is far more comprehensive than the normal financial audit conducted annually by a CPA. This will invariably result in a considerable amount of (billable) time at a significant cost. A church must carefully consider the cost/benefit analysis of a particular matter to determine if using a CFE is prudent. Certainly, if a large amount of money is involved and the matter will potentially be litigated in court, the situation will likely demand a professional investigation.
2. Culture. Bringing in a professional investigator to probe a member or leader of a church can seem distasteful. Churches tend to be trusting, forgiving organizations that think their religious purposes are sufficient to protect them against financial misconduct. When a church’s trust is violated, they tend to respond with denial and/or excessive leniency toward the wrong-doers.
Harvey has worked with churches that have chosen to “throw the book” at offenders, and he’s worked with some that simply let the offenders go after they said they were sorry. One approach errs on the side of extreme legal measures while the other allows the perpetrator to go free and ply his trade at another church. Each church’s culture will lean one way or the other. Here are some factors to consider when determining what measures to take to examine the fraud, handle its consequences, and prevent it from happening in the future:
- Does the offender demonstrate genuine repentance?
- What is the amount of the loss?
- What potential adverse publicity may our church experience?
- What does our church’s governing board or denominational policy require of us in this case?
- What specific doctrinal or biblical perspectives can we apply to give us guidance?
- Did a breach in our internal controls allow this fraud to occur?
3. Culpability. The impartial examination conducted by a CFE may reveal more than just the fraudulent misappropriation of resources from the church; it may also reveal the climate in which this crime was allowed to happen. Churches with poor or nonexistent internal controls may discover that their laxness aided and abetted the embezzlers. A CFE sometimes reveals cracks in the foundation, which some churches may not want to risk exposing.
When churches are willing to risk discovering that their practices helped enable fraud to occur, they demonstrate to the congregation their willingness to take responsibility (and if necessary shoulder part of the blame) to ensure that the offerings given by the members are not diverted from their intended purpose.
The work of a CFE is a two-sided coin. On the one side, a CFE can help a church create the right environment to prevent fraud from occurring. On the flip-side, if fraud has occurred, a CFE can assist the church with an investigation and mitigation of losses. The CFE can help a church stop theft, resume the flow of resources to the mission of the church, and provide proof for a solid case against the perpetrator.
CFEs earn their credentials through the Association of Certified Fraud Examiners (acfe.com), a professional organization that equips professionals in all industries to protect and detect fraud. CFEs must obtain a minimum of 20 hours of Continuing Professional Education (CPE) every 12-month period to stay current in their profession. Their professional expertise serves the church well.
