Advice on how to combat a growing problem
By Bob Smietana
Dana Sue Eckhart’s life unraveled a little bit at a time.
Eckhart, the former finance manager at her church in Stillwater, Oklahoma, was having trouble paying her bills after her mortgage payments skyrocketed in 2009.
The church, on the other hand, had plenty of money in the bank. So Eckhart decided to borrow a bit.
Then a bit more.
By the time she was caught, Eckhart had written more than $60,000 in checks from the church bank account to herself and nearly $68,000 in checks to her credit card company.
All told, Eckhart admitted embezzling $141,016.
“I started falling into the trap of ‘I just need a little to make ends meet and I’ll pay it back,’” she told a judge at her sentencing hearing this past August, according to published reports.
That’s a familiar story to Verne Hargrave, a certified fraud examiner and CPA with Arlington, Texas-based PSK LLC.
Hargrave has spent the last decade warning church leaders about the dangers of fraud. Few listen until it’s too late, he says.
“There’s the idea that this can’t happen here,” says Hargrave.
But it can.
Over the last five years, 425 churches insured by the Merrill, Wisconsin-based Church Mutual reported embezzlement crimes. The losses at those churches totaled $3.3 million dollars. In one case, a church leader stole $1.6 million from a building fund over an eight-year period.
Among other recent embezzling cases:
- A church board member in Oakland was indicted in April for allegedly diverting more than $500,000 to his personal accounts.
- The ex-bookkeeper of a church in Virginia was convicted in March of embezzling more than $760,000.
- A San Diego pastor was sentenced to five years in prison for stealing more than $3 million from the congregation.
A recent study of 132 churches published in Fraud Magazine found 13.4 percent of those churches experienced fraud over a five-year period.
Church legal expert Frank Sommerville believes church embezzling is even more common than what we hear about. Most times, he says, embezzlement goes unreported.
“Churches want to hush it up,” he says. “It’s a secret sin. We don’t want to know about it.”
Safeguard against pressure
Churches face a number of challenges in preventing embezzlement. Congregations are built on trust. And trust makes embezzling possible.
“That’s where churches make their big mistake,” says Hargrave. “They think only crooks embezzle.”
A 2014 study of 1,483 cases of workplace fraud in more than 100 countries by the Association of Certified Fraud Examiners (ACFE) found that few (5 percent) people who committed fraud had a past criminal record. Less than 1 in 10 (9.3 percent) had been fired from a job for fraud in the past.
More than half (52 percent) had worked for their employer for at least six years before committing their crimes. Few (6.8 percent) began their fraud on the first year on the job.
Instead, says Hargrave, embezzlers are often trusted employees who are under some kind of outside pressure and find themselves in need of money.
That pressure can show up in a variety of ways. A person’s spouse becomes ill or loses their job, and all of a sudden, there is a financial crisis. Addictions, unexpected expenses, or a family crisis can put people in a situation where they need cash fast.
That kind of pressure is one side of what fraud experts call the fraud triangle. And it can cause a person to make a terrible decision.
Experts like Hargrave say church leaders need to know what’s going on in the lives of people who handle money in the church.
That way, church leaders can offer help if they can. And they also can safeguard the church—and the employee or volunteer—from the threat of embezzlement.
“One of the things we recommend is that you know your people as best you can,” says Hargave. “Look for signs that things are not right at home.”
Make it hard for people to embezzle
To be successful, an embezzler needs access to money with no oversight. It’s what fraud experts refer to as opportunity, the second side of the fraud triangle.
Hargrave says most churches go to great lengths to keep people from stealing from the offering plate. They have two or more people count the collection, and then make sure the tithes and offerings are locked up right away. But they don’t always pay attention to how money is spent. Instead, churches often put too much responsibility in the hands of one person.
For example, in about half (48 percent) of the churches surveyed by Fraud Magazine, the same person who writes the checks also reconciles the bank statements and creates the financial reports.
That’s asking for trouble.
Without oversight, an embezzler can easily create false invoices, run up personal charges on the church credit card, or write checks to themselves for months or even years before they get caught. By then, tens or even hundreds of thousands of dollars could be missing.
According to the ACFE, the median workplace fraud lasted 18 months and totaled $130,000 in losses.
“The shame of it is that very few of the cases we are involved in are high-tech scams,” Hargrave says. “They are extremely simple processes that could have been prevented with a handful of safeguards.”
The most important safeguard is what’s known as “segregation of duties.” That’s accountant-speak for assigning financial duties to more than one person.
For example, if the church office manager writes the checks, then someone else should balance the checkbook and prepare the financial reports. A church finance committee should review the actual bank statements (either in paper or online) to make sure the numbers add up.
All credit card purchases should be reviewed as soon as possible. And no checks should be signed ahead of time or be made out to cash.
Experts also suggest churches have as few bank accounts as possible. Sometime embezzlers will use a forgotten or overlooked account to help them steal money.
These kinds of measures can help keep good people honest and make embezzlers think twice about the risk of being caught.
“The more barriers you put up, the harder it’s going to be for people to steal from you,” says Sommerville.
Treat your people well
The third leg of the fraud triangle is rationalization. Embezzlers often convince themselves that their actions are justified.
Sometimes they decide to “borrow” money for a short period of time, with the intention of paying it back. Other times they’re resentful of their employer, and steal as a way of getting back at them.
Or perhaps they feel like the church isn’t paying them what they’re worth, and they steal as a way of making up for wages they think they are due.
Being underpaid doesn’t excuse embezzlers. But it can fuel a sense of resentment, which can lead to bad consequences for a church.
Time to call a lawyer
Embezzlement or other fraud is often revealed in a variety of ways. A check unexpectedly bounces. A vendor complains they haven’t been paid. A credit card company calls about an account that no one knows about. Or someone notices a financial report doesn’t add up.
At that point, Sommerville suggests church leaders call a lawyer for advice before doing anything else.
Their lawyer can look at the books, and if things seem awry, can hire a fraud expert or accountant to review the church’s account. If a lawyer hires the fraud expert, then their findings can be kept confidential.
The important thing is to get the facts straight before confronting a suspected embezzler. That way a church can avoid making a false or incomplete accusation.
“It’s a landmine if you falsely accuse them,” Sommerville says, “and a landmine if you don’t accuse them of everything.”
If they are confronted too early in the process, embezzlers may try to minimize their wrongdoing by admitting to taking a small amount of money and offering to pay the church back. Church leaders may be tempted to accept that first offer. But that’s a mistake, says Sommerville.
“You don’t want to settle with them and get a check for $2,500—and then realize, they stole $50,000,” he says.
Church leaders also have to decide whether or not to call the police, which is a fairly complicated issue.
Proving someone has embezzled takes a lot of time. If an alleged embezzler has only taken a few thousand dollars, the police or district attorney may be reluctant to spend the time and money needed to prosecute the case, says Sommerville.
On the other hand, if an embezzler isn’t charged with a crime, that makes it easier for them to go to another church and do the same thing. The IRS also considers embezzled money or other money from illegal activity as taxable income, and churches may be required to report it.
Whatever happens, a church is unlikely to recover any funds from an embezzler. The money is usually long gone.
Nearly 6 in 10 (58 percent) of organizations in the ACFE report having received no restitution once the fraud was discovered. Only 14 percent recovered their losses.
And losing money isn’t the worst part, says Hargrave.
The recriminations, anger, and sense of betrayal inside the church linger long after the embezzler is gone.
“There’s usually a report to the church and the final sentence is ‘the finance committee has implemented new accounting procedures,’” Hargrove says. “Those are often famous last words.”
Bob Smietana (@BobSmietana) is senior writer for Facts & Trends.