Alleged embezzlement by Menlo Park rector raises larger governance questions

It’s hardly a first.

In an article that has attracted relatively little notice, the rector of Trinity Episcopal in Menlo Park CA recently was fired after allegedly embezzling more than $200,000 over a period of five years.

Details were uncovered via a months-long forensic audit, and total losses were more than double the amount church officials originally believed had been stolen.

Of course, this is hardly the first such case.

Earlier this year, a small church in New York experienced a major loss. And no one can forget the Ellen Cooke scandal, in which millions were stolen from the church’s national headquarters, even as dozens of employees were being laid off to balance the budget.

The common theme? In all instances, internal controls were inadequate to prevent and promptly detect fraud, waste, and abuse.

That’s particularly troubling in The Episcopal Church, where church canons require both annual audits and implementation of internal controls.

Nor is the Episcopal Church alone. Consider:

• Fully one-third of church employees will steal.
• The average loss is $120,000 and growing.
• Most often the thief is someone in a position of trust who is liked, respected, and has tenure with the organization.
• In the first half of 2014, churches lost $39 billion to fraud.
• During the same time, churches spent $35 billion on mission.
• By 2025 church fraud is expected to reach $65 billion.
• One-third of all churches will fall prey to theft.
• The average embezzlement goes on for 18 months before it’s detected.

Source: Patricia Lotich in Smart Church Management

But there’s another wrinkle to all this, one that is hard to quantify, but which I believe is endemic in the Episcopal Church. That is the misuse of funds that doesn’t rise to the level of fraud or theft, but still isn’t in keeping with the church’s mission.

Consider the priest who picks up the tab when he goes out to dinner with parishioners. If he buys from his own funds, that may be okay — although it can also implicate issues of perceived power and favoritism.

But if he uses a church credit card, or uses his discretionary account, chances are that’s inappropriate. Donors to the church, or to a discretionary account, expect the funds to be used for the kingdom of God—not entertainment expenses.

Speaking of credit cards, how many churches have policies regarding who gets a card that are ignored? I’ve been a member in several where the rector was not an authorized user, yet routinely carried a church credit card in his wallet.

I’ve also been a member of several churches in which out of state travel by the rector was paid for by the church, ostensibly for pilgrimages or weddings, but to all appearances the trip was nothing but a luxury vacation or cruise, paid for by the church. When travel is misrepresented like this, if nothing else it erodes trust among members.

Many churches also have lax procurement policies. Wardens, for example, may be able to initiate purchases without a purchase order or other approval. While this may increase operating efficiency, it also leaves all involved open, at a minimum, to unfounded suspicion and mistrust.

Equally problematic are churches where the vestry has to approve every purchase, no matter how small. Having sat through more than one multi-hour discussion over red versus yellow pencils, such meetings disempower staff, while leading to excruciatingly tedious vestry sessions.

Nor do most churches have whistleblower protections in their governance documents. That’s a shame, because most losses are discovered via tips. Thus, failing to protect whistleblowers further discincentivizes those who may already fear the repercussions.

Another problem in many Episcopal churches is confusion between an audit, a review, a compilation, and other means of examining financial records. I believe that many dioceses do themselves and their parishes a great disservice by allowing Agreed-Upon Procedures, or AUPs., even in parishes with budgets over $1 million. Such limited reviews are invariably depicted as audits, when they are not at all, and are unlikely to detect major problems.

Even more troubling is when rectors control who sees the CPA’s engagement letter and report. Suffice it to say that I while I was a member of Grace Episcopal church in Alexandria VA, the financial records were so bad the CPA’s couldn’t even complete a timely AUP, yet the rector portrayed everything as just fine. This should be profoundly disconcerting, even to the most trusting among us.

Still another dangerous phenomena: The church member who operates a school or other ministry, but tries to conceal financial details with comments like, “You only need to worry about my salary. I’ll take care of the rest.” Unfortunately, that is both an invitation to misconduct and a per se violation of the fiduciary obligations of vestry members and other leaders. As a leader, you have an obligation to know, to understand, to be advised, and to ask relevant questions.

There’s much more I’ll write about these issues, but for now the key point is that most theft correlates directly with the fragility of internal controls. And my experience is that Episcopal churches invariably rate poorly in these areas—even the best would only rate a C- at any other non-profit.

In other words, Episcopal churches think stewardship is all about encouraging you to give them money. They don’t recognize that they have a corresponding duty to safeguard the very same resources that they solicit so assiduously from their members.