It's curious that this is what made you doubt the author, since the plot you propose is used in
a well-known and acclaimed science fiction story.
Cleve does talk about it
here.
I don't think it's explicitly stated whether the villagers knew about it, or if it was just the Crusade Temple; the latter seems more likely. One of the reasons Argosyre cites for the deception is preserving Saint George's reputation. It's been mentioned that Crowl's reason for existence was as a village for pilgrims headed to the tomb, so the villagers might have some reason to participate. On the other hand, Raghilda knows her sister was last seen poking around the Crusade Temple, which would be a very odd thing to let her do if she knew. And if you haven't killed the Horror when come up through the pools, Argosyre attacks you to keep you from telling anyone. At this point, the only friendly characters in the accessible part of the game are people in Crowl, so it seems likeliest that he's worried about you telling them. Also, Mistral's ghost implies the temple specifically is to blame.