DESPITE WHAT SOME MIGHT SAY, THE CATHOLIC CHURCH HAS A BIG PROBLEM: EMBEZZLEMENT, AND IT AIN’T ANCEDOTAL ANYMORE

Dateline: January 2, 2007, Chicago

Over the last several years, we have reported on several alleged embezzlements involving priests and other church officials in the Catholic Church.  Someone apparently shares our curiosity about how pervasive these frauds and embezzlements are.  Villanova University’s Center for the Study of Church Management has released a paper authored by Robert Wyatt, Ph.D. and Charles Zech, Ph.D, both affiliated with Villanova, entitled Internal Controls in the U.S. Catholic Church.  The paper is based on a survey of chief financial officers at all 174 United States Catholic Church dioceses. 

Only 78 (44.83%) bothered to respond.  Eighty-five percent of those responding reported embezzlements over the last five years.  Of those, 11% ...

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had experienced thefts of at least $500,000.  One-third of the reporting dioceses indicated that they had experienced thefts under $50,000.  Zech told the National Catholic Reporter, “You can only wonder about those dioceses that didn’t respond to our survey.”  Joe Feuerherd, 85% of U.S. Dioceses Report Embezzlements, National Catholic Reporter, Dec. 21, 2006.  There were 96 non-responders.

Some caution is required when reviewing the data.  Specifically, the survey was sent to dioceses, which are not specific church parishes. For examples, the Archdiocese of Chicago is comprised of 378 individual parishes.  Consequently, the numbers should not be taken to mean that there have been thefts at 85% of the thousands of individual churches making up the Catholic Church in the United States.  Second, the $500,000 and $50,000 numbers do not refer to specific thefts at individual churches, but to aggregate thefts within a diocese.

According to the survey results, police reports were filed in 93% of the cases and insurance claims were filed in 91% of the cases.  Both numbers are significantly higher than we would have expected.

We have written in the past about the U.S. Conference of Catholic Bishops' internal control framework. It is an excellent checklist for any organization, be it Catholic, Jewish, Muslim, Hindu, or non-sectarian.  Yet, West and Zech point out that the guidelines are just guidelines, with no enforcement mechanism or requirement that they be implemented.  However, the Code of Canon Law (1983) does impose certain requirements on the each bishop. Specifically, each diocese must have a diocesan finance council (Canon 492).  That council is charged with preparing an annual budget (Canon 493), advising the bishop on real and financial investments (Canon 1305), and examining the annual income and expense reports (Canon 494).

The statistics with respect to diocesan finance councils are very interesting.  These councils are quite active, according to West and Zech.  That leads to the question:  Why are they apparently ineffective?  We suspect this is due in large part to the fact that the monitoring should be more localized, with powerful lay councils at the parish level. 

The data arguably supports our view.  West and Zech focus on audit levels and procedures at the diocese level, but report that theft is most often detected by the parish priest, bookkeeper, an internal auditor, or the parish finance council.  External audits are least effective in uncovering fraud for the reason our very own Jack Siegel keeps telling nonprofit groups when he speaks to them.  The focus of the audit is on the fairness of the financial statements rather than fraud detection.  These results (the ineffectiveness of external audits in detecting fraud) are consistent with the Reports to the Nation issued every two years by the Association of Certified Fraud Examiners.

Somewhat troubling is that only 55% of the diocesan finance councils have adopted formal conflict-of-interest policies. 

West and Zech did discover through multiple regression analysis two factors that appear to reduce fraud ( or are at least correlated with reduced levels of fraud).  The more frequently the diocese finance council meets, the less fraud.  The more involved the diocese finance council is in budget review, the less fraud.  On the other hand, the presence of a conflicts-of-interest policy appears to have little effect.  West and Zech also found that the presence of a formal fraud policy was correlated with reduced fraud.  The most important factor was the frequency of internal audits (as opposed to external audits). More internal audits are correlated with reduced levels of fraud.  That is not surprising.

West and Zech recommend the following control policies to help curb fraud (this list is quoted from the paper):

•    Implementation in every Catholic diocese of the policies prescribed in the USCCB  handbook Diocesan Financial Issues

•    The establishment of fraud policies in every diocese

•    Annual internal audits of parishes supplemented by external audits conducted at least every three years

•    Public disclosure of the names and professions of every member of the Diocesan Finance Council, along with their conflict of interest guidelines

•    At a minimum, quarterly meetings of the DFC (or one of its subcommittees) to monitor diocesan office, parish, and school financial reports

•    Selection of the diocesan auditor by someone (bishop or DFC) other than the diocesan CFO

•    At least annual (and preferably more frequent) submission of financial data by all parishes and high schools

•    Establishment of a uniform budgeting process and standardized software for all diocesan entities

•    Establishment of communication channels for church workers to report suspected irregularities or fraudulent activities while protecting their anonymity.

 While the paper does not specifically detail what funds were embezzled, we suspect the cash collection plate is vulnerable. In our view, this type of embezzlement is easily prevented.  The problem appears to be rooted in the naive belief that people who work in religious organizations are honest.  In the end, the solution lies with those who fill the collection plate.  Stop giving until those in charge are willing to make sure your hard-earned money gets to those who need it rather than those who take it.

Fortunately, recent tax legislation also may help reduce the problem, at least to the extent donors itemize their deductions The Pension Protection Act of 2006 contains a provision  that more closely aligns the substantiation rules for gifts of money to the substantiation rules for property found in Section 170(f)(8) of the Internal Revenue Code.  Now, regardless of the amount involved, in order to claim a deduction for for a  charitable contribution of money, the donor must have a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.  See Section 1217 of the Pension Protection Act of 2006.

As a consequence of this provision, charities will be effectively forced to provide receipts to donors of cash.  In addition to improving the substantiation of claimed deductions, this provision should generate an audit trail for charities so that they can better reconcile what was received on Sunday morning and what ultimately was deposited in the bank.  That assumes the documentation is issued in duplicate, with the parish keeping one copy.  There is no excuse if the parish fails to produce and retain a duplicate copy.  Of course, the receipt book should be pre-numbered.

And a special thanks to Gary R. Snyder for alerting us to this study through his online newsletter that we receive by e-mail.  Mr. Snyder is the author of Nonprofits: On the Brink, available through Amazon.com.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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