Fraud in Ministries: How to Respond

by Rufus Harvey

So, despite your best efforts to avoid being a victim of fraud, you have uncovered what appears to be a major loss of assets from your organization. Now what?

Initiate an investigation. An investigation of some type is always necessary to determine first if what you have discovered is a crime or simply the result of mistake, ineptness, or incompetence.1 The choice of competent individuals to investigate fraud is  a key decision. The investigation can be internal (by the organization’s employees) or external (by outside examiners), but the investigators must be competent to perform a fraud examination which will hold up in court, if necessary.

If you choose to use an outside expert, you may want a CPA or a CFE (Certified Fraud Examiner). Use these qualifications you can use to establish a likely, competent candidate:

  • Professional licensure, certification, or registration by a recognized professional body in the field
  • Undergraduate, graduate, and postgraduate academic degrees that are either in the field of expertise or serve as a suitable background to it
  • Specialized training and/or continuing professional education beyond academic degrees that indicate up-to-date familiarity with the latest technical developments
  • Having published writings that display technical opinions and are available as part of the general body of knowledge
  • Any teaching, lecturing and/or other consultancies that indicate that he or she is held in high professional esteem
  • Affiliation wi­th professional associations
  • Directly relevant prior experience gained through similar assignments, whether as technical advisor or expert witness
  • Special status or access to privileged information peculiar to the case at hand, which renders the individual an expert2

There must be proof. Whomever you chose must be able to provide the following proofs to demon­strate that a fraud has occurred:

  • Intent – the accused committed the act knowing it was wrong.
  • Misrepresentation – the accused misrepresented key aspects of the transaction to the victim.
  • Reliance – the victim relied on the misrepresentations of the accused.
  • Loss – because the victim relied on the intentional misrepresentations of the accused, financial losses resulted.3

Respond to the revelations. A successful investigation will allow the organization to do four things in response:

  1. Qualify and quantify the loss. The first item of business for the investigator will be to determine and document how much was taken from your organization.
  2. Identify the perpetrator(s). A natural by-product of the investigation will be to confirm or disprove the suspicion of a potentially dishonest person who has access to your organization’s resources. The investi­gation might point clearly to the actions of one individual while exonerating another. A thorough investigation will expose the culprit but protect the innocent.4
  3. Stop the loss. The investigation will also become a sound basis for developing effective countermeasures to stop the fraudulent activity and prevent its recurrence.5 The organization will certainly want to remove any known perpetrator of fraud from a position of access to the organization’s resources. Internal controls associated with the loss should be carefully examined and adjusted to prevent future losses. In most cases, simple changes can provide excellent protection:
  • Require two signatures on every check.
  • Institute dual custody of all funds from initial receipt until deposit in the bank.
  • Have bank and investment statements sent to a person who does not have accounting and investment responsibilities.
  • Have someone other than the person writing checks reconcile the bank account.
  • Run a background check before hiring anyone to handle organization resources.
  1. Deal with the perpetrator(s). This is certainly the most sensitive area of response to a fraud. The ethical and legal choices are obvious and include:
  • terminating the offender
  • filing criminal charges
  • pursuing a civil lawsuit
  • implementing biblical church discipline (see Matthew 18:15-18)

The business decisions are less obvious and often are best made with the assistance of competent legal counsel. Among the potential consequences that must be carefully considered are:

  • adverse publicity
  • legal costs
  • decline in organizational morale6

Once the case is proven, people in leadership of churches and Christian charities are often reticent to take decisive action against one who has defrauded their organization. In my career as a fraud examiner, I have worked cases where the organization chose everything from the proverbial “throwing the book” legally at the offender to doing absolutely nothing, and various actions in between. Why is this?

Each ministry will be faced with a unique variety of circumstances to consider:

  • the attitude of the offender
  • the culpability of the organization (poor internal controls, etc.)
  • the magnitude of the loss
  • the publicity of the matter
  • organizational or denominational policy
  • doctrinal or biblical perspectives

All believers can agree with the explicit command in Exodus 20:15, “You shall not steal.” Most of us understand Paul’s warning in Romans 13, “For rulers are not a cause of fear for good behavior, but for evil. Do you want to have no fear of authority? Do what is good and you will have praise from the same; for it is a minister of God to you for good. But if you do what is evil, be afraid; for it does not bear the sword for nothing; for it is a minister of God, an avenger who brings wrath on the one who practices evil” (vv. 3-4, NAS).

The difficulty comes in discerning when a particular situation warrants mercy from the consequences of a particular sin, due to the unique circumstances involved. Perhaps the best solution to that dilemma is to follow the prescription of James 1:5, “But if any of you lacks wisdom, let him ask of God, who gives to all generously and without reproach, and it will be given to him.”


1 Howard R. Davia, et. al., Manage­ment Accountant’s Guide to Fraud Discovery and Control (New York: John Wiley & Sons, Inc., 1992), 156.
2 G. Jack Bologna and Robert J. Lundquist, Fraud Auditing and Forensic Accounting: New Tools and Techniques, Second Edition (New York: John Wiley & Sons, Inc., 1995), 208.
3 Joseph T. Wells, Encyclopedia of Fraud (Austin, TX: Obsidian Publishing, 2002), 431-432.
4 Russell L. Bintliff, White Collar Crime Detection and Prevention (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1993), 21-22.
5 Ibid.
6 Gary S. Green, Occupational Crime (Chicago: Nelson-Hall, 1990), 238-239.

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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