The pitfalls of shrouded finances: mandatory public disclosure could make the difference between good stewardship and the kind of fiasco that has rocked the Cleveland diocese

National Catholic Reporter, March 21, 2008 by Bill Frogameni

Santiago "Charlie" Feliciano spent two decades working as an in-house lawyer for the Cleveland diocese. When he finally left in 2000, he had been the general counsel, Bishop Anthony Pilla's main legal adviser, for 16 years.

Feliciano held one of the top posts in the diocese's Financial and Legal Office. Yet, talk to Feliciano and he'll tell you how large swaths of diocesan finance remained a mystery to him.

He paints a picture of himself as a man who was inside, but really on the outside. Someone who should have known the details of questionable schemes then being cultivated--schemes that later mushroomed into the ugliest diocesan-level money scandal to hit American Catholicism in decades.

But Feliciano says he didn't know.

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"They never let me anywhere near a checkbook," he said.

The Cleveland case may present an extreme example of a lack of financial accountability, but it hardly stands alone. Cases of embezzlement and improper handling of parishioner and diocesan money are so widespread that the U.S. bishops were prompted recently to emphasize the need for controls. But there is little the bishops as a group can do to enforce their own recommendations, since each bishop is autonomous and without oversight when it comes to running his individual diocese. A number of lay groups have attempted to high-light the issue of financial accountability within the church. One group of professionals has put forward recommended standards for accountability.

In Cleveland, Feliciano was cut out of policy meetings, where he might have expressed legal opinions about the imprudence of self-dealing or other questionable executive compensation practices. "They should have regularly run things by me, but they chose not to," he said.

The Cleveland scandal, now approaching its last act in federal court, involves Pilla and other top diocesan officials, one of whom, Anton Zgoznik, was convicted last year in federal court and another, former chief financial officer Joseph Smith, who faces his own trial later this year. It was only after Feliciano left the diocese that another insider mailed a stack of financial documents to Cleveland media--the proverbial smoking gun. It was then, said Feliciano, that he started to get a clear picture of the embezzlement that had been happening more or less under his nose.

If it seems a bit peculiar for a top church insider to be that out of the loop concerning church finances, what can the average parishioner expect to know about the finances of an institution where virtually all control is in the hands of local bishops and the diocese is largely exempt from publicly disclosing its financial operations to the Internal Revenue Service?

Special protections

In the United States, churches, church auxiliaries and many other religious-affiliated institutions enjoy special financial protections. As nonprofit establishments, they are exempt from paying taxes, although they are still obligated to abide by tax laws regarding accurate accounting, executive compensation, insider deals and so forth. Unlike most secular nonprofits, churches and many religious affiliates are not required to file IRS Form 990, a comparatively simple disclosure that gives a basic picture of an institution's finances and, perhaps most important, is available for public scrutiny.

Within the Catholic church, individual dioceses often have tens of millions of dollars in assets under management. Given the scope of church operations, mandatory public disclosure via IRS Form 990 could make the difference between good stewardship and the kind of fiasco that has rocked the Cleveland diocese.

There is a growing awareness in clerical, lay and academic circles that church financial policies need to be improved, but no mechanism exists to force something to be done about it. In January 2007, an advisory committee to the U.S. Conference of Catholic Bishops called for greater internal financial controls at the parish level. The committee recommended the bishops implement several "best practices," including greater documentation and "prosecution for all cases of fraud in the diocese." For several years, the bishops' conference has also had in place detailed recommendations for financial management at the diocesan level. The recommendations, however, remain only that: Canon law and civil law don't obligate any bishop to answer to his brother bishops in other dioceses.

Making the church publicly account for finances is a goal of numerous reform advocates, including Professor Charles Zech of Villanova University's Center for the Study of Church Management. In 2006, Zech published a study that identified embezzlement in 85 percent of U.S. dioceses for the five years prior to the study. Zech's study compiled data from the chief financial officers of 78 dioceses who responded to a survey that 174 diocesan CFOs were asked to complete. If the percentage of dioceses reporting embezzlement seems startling, "you can only wonder about those [96] dioceses that didn't respond to our survey," Zech told NCR in 2006.