Church Fraud and Financial Stewardship: A Cautionary Tale from Silicon Valley

Every business is conceived inside a catch-22. On the one hand, a business cannot grow until it has the confidence of investors. On the other hand, it can’t win the confidence of investors until it has begun to grow—or at least given persuasive grounds that it will.

In many respects, churches face a similar paradox: Before a church can impact the community, it must have the confidence and trust of that community.

To acquire some credibility, businesses use a strategy of “fake it til you make it.” It’s commonplace. In fact, it’s something of a startup dogma. In fact, some would say it’s a necessity for an environment that encourages entrepreneurship and innovation.

Obviously, the policy of “fake it ‘til you make it” is a bit of a grey area, ethically speaking; but as Fortune magazine reports, there is no better petri dish for poor ethics than Silicon Valley.

Naturally, rising alongside the startup-breeding habitat is a culture that celebrates the rule-breaker and disruptor; the entrepreneurial bulldog who beats the system, “moves fast and breaks things,” and delivers a revolutionary piece of tech. The world is waiting to applaud the next Larry Ellison or Steve Jobs. “Breaking the rules makes you a Silicon Valley hero,” reports Erin Griffith. “That’s great if you’re breaking a dumb rule, not so much if you’re breaking an important one.”

A memorable example of this begins with a Silicon Valley startup called Theranos. Founded by Elizabeth Holmes, the company vowed to revolutionize medicine by developing a blood-testing machine that could “automate and miniaturize more than 1,000 laboratory tests” in a manner that would “require only microscopic blood volumes.” The start-up got a lot of press and Holmes skyrocketed to stardom, sitting in interviews and delivering TED Talks while sporting a black turtleneck, à la Steve Jobs. In 2013, Fortune slapped her face on their magazine cover.

After existing for a mere 10 years, private investors estimated the company was worth $9 billion.

But in 2015, The Wall Street Journal uncovered a slight problem: Theranos’s promised technology didn’t exist. The company’s success came down to some terrific (and hyperbolic) marketing based on dubious test results.

But Theranos was just the beginning. Since then, a series of similar stories have cropped up around Silicon Valley. Says Griffith: “Faking it, from marketing exaggerations to outright fraud, feels more prevalent than ever—so much so that it’s time to ask whether startup culture itself is becoming a problem.” If this trend continues, we can expect it will become more and more difficult for startups to gain the confidence of investors.

As distrust leaks into Silicon Valley, what are the long-term consequence for the economy and technological progress?

Well, we won’t get into all that.

The question for now: What does all this have to do with churches?

The Reality of Church Fraud

When investigating fraud in the nonprofit world, you will notice churches are often excluded from reports. This is because, unlike other nonprofit organizations, churches are not required to make annual reports under federal law, which gives them a high degree of independence and privacy. Consequently, although it is reasonable to assume that some amount of fraud takes place in the church space, it is almost impossible to know how much. Reports suggest there was a spike of fraud among churches in the 80s, but such reports don’t clarify whether or not more fraud was occurring than in prior decades or if—corresponding with the church growth movement of the late-twentieth century—more fraud was being reported. In any case, estimates suggest 95 percent of church embezzlement goes undetected or unreported (that figure is 66 percent in the business world).

Although churches are thought to uphold a higher moral and ethical standard than the rest of the world, they are still institutions run by fallible human beings. Corresponding what we know about fraud in the business world to the church, we can conclude a few things:

• Fraud exists in the church space.
• More fraud takes place than anyone knows.
• No church is immune to fraud.
• Net millions of dollars from donors and tithers is lost annually to fraud.

These are four facts that every church leader needs to assume and take seriously.

Thankfully, churches are not facing the same disrepute as Silicon Valley startups. Even if many disagree with their message, church leaders enjoy society’s trust when it comes to money, for the most part. However, church fraud does not need to be on the rise before church leaders take steps to prevent, detect, and deter embezzlement in their churches—if they wait, the church may well go the way of Silicon Valley.

And if distrust leaks into the church space, what are the long-term consequence for ministry and outreach?

The Fraud Triangle

The first and most essential way to prevent fraud is to know what causes it. And as David Sawyer puts it, “An ounce of prevention is worth a pound of the cure.” The Association of Certified Fraud Examiners (ACFE) identifies three main factors behind workplace fraud (the Fraud Triangle, so-called): Pressure, Opportunity, and Rationalization.

Just because all three legs are present does not guarantee that fraud will occur. In fact, the opportunity to act unethically happens more regularly than you might think. No act, whether it’s downright illegal or ethically gray, is inevitable. In the end, it comes down to choice.

Let’s look at these in reverse order:

1. Rationalization

An essential characteristic of rationalization is the wrongdoer does not view himself as a criminal. He is most likely committing fraud for the first time, but he doesn’t see it as fraud. He sees it as borrowing (“I’ll return the money…”), entitlement (“I’ve earned this…”), vindication (“I’m underpaid, and my employer deserves to be fleeced…”), etc.

Rationalization is especially prevalent if the fraudster is convinced that what they are doing is for a good cause.

Churches are not immune from this sort of thinking. Unlike businesses, churches aren’t for-profit. But in an ironic twist, this could make them even more susceptible to rationalization than corporations.

Look at it this way: When you are in “the business of saving souls,” you are engaged in the most important work in the world. The stakes have never been higher or the need greater. Under the magnitude of such a calling, ethically questionable marketing practices—even if they undermine your message—might seem petty, especially if they guarantee your message will get more exposure.

What is more important: A little rule or the eternal destiny of a human soul? What are we unwilling to do to get someone into church on Sunday?

2. Opportunity

Very few people will do something ethically questionable unless they believe they can get away with it. For private companies, such opportunities are easier to come by. This is because private companies are, well, private. They can select what they report about themselves. They can also choose not to report at all. This gives them a lot of control over their public image.

Moreso today than ever, church leaders have an image to protect (and to promote). If, on one hand, they have sins, debts, or habits that would reflect on them poorly, their first impulse is to resolve them alone rather than seek help and redemption. “Many people commit white-collar crimes to maintain their social status,” writes ACFE. “For instance, they might steal to conceal a drug problem, pay off debts, or acquire expensive cars or houses.” The cruel irony is getting caught does as much (if not more) damage to their status than the secrets they are trying to cover.

Conversely, church leaders might be in the process of promoting their image in the public eye. Building credibility in their communities or the culture at large by appearing trendy, authentic, or successful is also an aspiration that could incentivize fraudulent behavior.

Church leaders must be mindful of the pulls in their life. As the temptation to engage in an unethical activity increases, church leaders are in a unique position to carve out the opportunity they need to get away with it. Oftentimes, given the level of privacy they enjoy, as well as their status as spiritual and moral leaders, they don’t need to wait for an opportunity to arise. They can create one themselves.

3. Pressure

This is what incentivizes the fraud in the first place. For companies, this is usually the appearance of a financial problem that seems unresolvable through legitimate means. However, the pressure can also be cultural.

For the church, the pressure to grow and innovate is endlessly reinforced by a broader church growth movement analogous to Silicon Valley’s “industrial district” habitat. It would be difficult to find a modern church leader who has not read at least one book or attended a conference about church growth. We live in a church culture that expects churches to grow, and grow big.
Certain practices—even if ethically questionable—are more enticing to the church leader if he imagines they are expected of him. The level of pressure is difficult to gauge, but pastors feel it nationwide. And the world is waiting to applaud the next Joel Osteen or Rick Warren.

How to Protect Your Church from Fraud

The burden of responsibility to protect a congregation and their freely given offerings from fraud falls on the shoulders of church leaders. In the end, it isn’t only the good-faith of your congregants that you honor. When the churchgoer writes a check, he or she may make it out to your church, but ultimately it is an offering, and offerings are given to God, not men. Church leaders are mere stewards of church finances, but God is the owner. It’s His money.

Corporate fraud is bad and never victimless, but it robs only people. Church fraud robs people and God.

So here are a few ways to protect your church from fraud:

1. Draft a zero-tolerance policy

Make it clear to every staffer and leader what the church’s position is on fraud. Discourage it before it happens. You might even produce a definition: “Church finances are not for personal use,” etc.

2. Establish an approval process for purchases

Nothing should be bought without the knowledge and consent of someone else. Any time cash flows out of the treasury, at least three pairs of eyes should be following it.

3. Require those responsible for the handling of money to take at least a one-week vacation from duty each year, and have someone else fulfill the duties during that time

Consider resistance to this vacation a red flag. Appointing several money-handlers in rotation is another safeguard.

4. Counting the offering should be done behind a locked door

It is also a good idea to have a camera overlooking the counting area.

5. Go mobile

The list of preventative steps decreases significantly once checks are out of the picture. Moreover, a giving app not only adds another level of privacy for individual givers, but it makes finances easier to organize and, therefore, to track. Some mobile giving solutions such as Pushpay’s also feature batch reconciliation and independent audits, allowing for easy review of annual financials and controls. Finally, sharing a church financial account with numerous “members” can add additional layers of built-in accountability and transparency.

No church is immune to fraud. How is your church doing?