Cemetery fraud uncovering schemes and scams against consumers and the cemetery paul g german jr cpa
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Cemetery Fraud: Uncovering Schemes and Scams Against Consumers and the Cemetery Paul G. German, Jr., CPA PowerPoint PPT Presentation


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Cemetery Fraud: Uncovering Schemes and Scams Against Consumers and the Cemetery Paul G. German, Jr., CPA. Introduction. Consumer fraud committed in the death care industry – infrequent but each instance is troublesome

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Cemetery Fraud: Uncovering Schemes and Scams Against Consumers and the Cemetery Paul G. German, Jr., CPA

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Cemetery fraud uncovering schemes and scams against consumers and the cemetery paul g german jr cpa

Cemetery Fraud: Uncovering Schemes and Scams Against Consumers and the Cemetery

Paul G. German, Jr., CPA


Introduction

Introduction

  • Consumer fraud committed in the death care industry – infrequent but each instance is troublesome

  • We see fraud committed against owner more often – consumers are not always affected

  • We advise clients on how to prevent fraud


Types of fraud improprieties of concern

Types Of Fraud / Improprieties Of Concern

  • Company Funds – stolen or diverted

    Examples:

    • Phony Contracts Written by Counselors

    • Counselor fronts the down payment if commission program is poorly structured


Types of fraud improprieties of concern to regulators

Types Of Fraud / Improprieties Of Concern to Regulators

  • Consumer Funds (actual dollars) Are Stolen Or Diverted.

  • Laws and Regulations Are Not Complied With:

    • Deposits not made to trust as required.

    • Improper withdrawals from trust are made.

    • Annual reports to state regulatory agency.

  • Misrepresentation or pressure is applied to consumers in order to obtain a sale.


Fraud triangle

1-2

Fraud Triangle

Incentive/Pressure

Opportunity

Rationalization/Attitude

(Weak Internal Controls)

(justification or “owed”)


Pareto s rule

Pareto’s Rule

  • 20% of any set will be responsible for 80% of the effect – Cash misappropriation represents approximately 75% of such crimes.

  • Dr. Juran repostulated this as:

    “The vital few and the trivial many”

    • 20% of customer will generate 80% of the revenues

    • 20% of the products will generate 80 of revenues


What is of most concern to state regulators

What is of Most Concern to State Regulators?

1.Consumer funds are stolen or diverted.

2.Deposits not made to trust as required – in the proper amount and/or proper time.

3.Improper withdrawals from trusts are made.

4.Annual reports filed with state agencies are proper and timely.

5.Misrepresentations or pressure is applied to consumers in order to obtain a sale.


Common control failures

7-5

Common Control Failures

  • Poor physical access controls

  • Poor operational (or not functioning) controls

  • Lack of formal job descriptions

  • Inadequate separation of duties

  • Inadequate supervision

  • Poor Management


Cemetery owners and consumers benefit from

Cemetery Owners And Consumers Benefit From:

  • Good hiring practices

  • Strong system of internal financial controls

  • Strong business ethics

  • Good outside legal and CPA counsel that understand the industry

  • Knowing who salespeople are calling on and follow up processes

  • Thieves are fired and prosecuted


How the areas of concern might happen and what can be done to prevent them

How the areas of concern might happen and what can be done to prevent them

No business is foolproof to a thief who is determined.

The goal is to prevent this from harming consumers.


Consumer funds actual dollars are stolen or diverted how might this happen

Lack of pre-numbered sales contracts

Lack of accountability over those pre-numbered sales contracts.

Lack of follow up program after cooling off period

Strong chance that they would not turn in the contract in this situation.

They can print their own contracts that would fool a customer

IMPACT – cemetery would not be collecting the funds and would not be able to set aside the appropriate amounts into trust.

Consumer funds (actual dollars) are stolen or diverted – how might this happen?


Lapping of customer payments once received at cemetery what is it remember ponzi schemes

Lapping of Customer Payments Once Received at Cemetery – What is it? Remember Ponzi Schemes?

  • One customer’s payment is posted to another customer’s account whose payment was stolen.

  • Often disguised through general ledger accounts such as cancellation expense, trade-in allowance, etc.

  • IMPACT –

    • Trust deposits may still get made, but on behalf of the wrong customer

    • May be untimely as a result

    • Recordkeeping nightmare with consumer prepaid accounts


Results from poor internal controls over cash receipts functions

Results from poor internal controls over cash receipts functions

  • How to Avoid This

    • Proper segregation of duties

      • Lack of technical (computer) capabilities and a small staff increases risk of non segregation of duties.


Results from poor internal controls over cash receipts functions1

Results from poor internal controls over cash receipts functions

  • Segregate each function from the other with different personnel

  • All Cancellations should be followed up with phone conversation

    • Good collections efforts call within 10 days of a missed payment


Laws and regulations are not complied with

Laws and regulations are not complied with:

  • Deposits not made to trust as required – in the proper amount and/or proper time

    • These errors are normally honest mistakes which management corrects as soon as the problem is discovered.

    • Intentional, the owner/manager feels the business is under tight cash flow and will make the deposit later - but never does.

    • Steal the cash for personal use and gain.


Independent verification of that reporting

Independent verification of that reporting

  • To ensure the deposits were made in proper amount and at proper time

  • State agency auditors

  • Independent CPA’s

    • Various types of engagements

  • Without independent verification, there is no real way to be certain that the deposits were properly made.


Pre need operations

Pre-Need Operations

  • No CASH, if at all possible

  • Confirm arrangements by telephone and in writing

  • Consider a secret shopper sting

  • Require credit and background investigation for employees

  • Adequately bond all staff


Withdrawals from trusts are made

Withdrawals from trusts are made

  • Without proper support or authorization – for improper use

    • PC (EC) – should normally be income distributions.

    • Merchandise – should be for fulfillment of contracts, perhaps with accumulated interest, and/or for cancelled contracts


Critical elements to prevent this from happening

Critical elements to prevent this from happening

  • Well written trust agreement

  • Independent party serves as trustee

  • Requests for withdrawals must by accompanied by appropriate supporting documentation before disbursement from trust is made

  • Trustee must comply with any reporting requirements to the State


Annual reports to state regulatory agency

Annual reports to state regulatory agency

  • Not filed – not a good sign; regulators beware

  • Filed late – perhaps cause for concern

  • Filed incorrectly – “problematic” issues I have seen


Incorrect filings of annual reports

Incorrect Filings of Annual Reports

  • Reporting of realized capital gains and losses.

  • Capital gains in one year, included as corpus, taxes paid the following year

  • Reporting forms not designed to permit reporting transactions properly as to corpus or income

  • Transactions with related parties and the trusts

  • Confusion in years where a cemetery is sold to another party – which party is responsible for reporting to the state agency?


Perpetual care and pre need trust fund potential fraud

Perpetual Care and Pre-Need Trust Fund – Potential Fraud

  • General risk of “needed” cash flow

  • Cemetery Management System to calculate and report required trusting

  • Funds never transferred to the trust

  • Fair value of discounted spaces is not trusted

  • Corpus of the fund is used for operational costs or other items


Misrepresentations or pressure is applied to consumers in order to obtain a sale

Misrepresentations or pressure is applied to consumers in order to obtain a sale

  • The key is for good sales managers and owners to review the sales contracts before cooling off period

  • Good ethics training

  • Prosecute or make it difficult for person to go elsewhere and do this again


Closing remarks

Closing Remarks

  • Fraud becomes extra sensitive in an industry where consumers are emotionally involved

  • Keys to fraud prevention

  • We all share common goals – for consumers, cemeteries

  • Challenges for state regulators

    • Adequacy of resources to carry out responsibilities

    • Unclear statutes

    • Changing political climate in state government

    • Understanding the industry

    • Being fair to both consumers and cemetery operators

    • Monitoring and enforcement of existing statutes and regulations


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