10 Jul

The Fraud’s In the Figures: Finding Clues in Financial Documents

SIU Today
By Daniel W. Draz, MS, CFE

Many types of insurance policies require that insureds submit financial documentation in support of insurance underwriting applications and claims submitted for payment. While the financial documentation submitted may be totally legitimate, it’s often hard for investigators to determine one way or another.

With the advent of desktop publishing, it isn’t difficult for documents to be altered, forged or simply created to fit a particular insurance documentation situation. Given a general unfamiliarity with these documents, the complexity of certain types of financial documentation can be intimidating for insurance investigators who don’t work with these forms and figures regularly. While it’s easy to get confused trying to evaluate the financial figures in terms of the insurance issues involved, investigators shouldn’t be discouraged. The numbers may hold important clues to the truth behind insurance applications and claims.

To illustrate what investigators should look for when reviewing financial documentation, this article features an interview with Tracy Coenen of Sequence Inc. Ms. Coenen is a CPA, a Certified Fraud Examiner (CFE), an author and regular industry speaker on the subject of fraud and financial investigations.

SIU Today: How can an investigator find red flags associated with financial document fraud in life, health, and disability insurance claims?

TC: For insurance claims that deal with illness or injury, such as workers compensation, disability, or personal injury the key to finding red flags of fraud is looking for financial information that doesn’t add up or is inconsistent with the claims submitted.

SIU Today: Can you provide an example?

TC: A disabled dentist who claims he is not working should not incur work-related expenses on the tax return. I examined a claim from a dentist who had a back injury and claimed he was unable to hold his arms up to perform procedures and couldn’t sit for any length of time.

An examination of the financial statements and tax returns showed that his dental practice, in which he was the sole dentist, experienced no decline in income. The documents also showed a constant level of lab expenses and dental supplies. Those types of expenses indicated that the business was still operating at the same level as before the disability.

SIU Today: How is that possible?

TC: The dentist claimed that he had excellent assistants who performed all of the work under his supervision. That didn’t make sense. If an assistant is able to do the work of a dentist, why do we need any dentists?

SIU Today: Were there other facts that didn’t add up?

TC:
Yes, significant “automobile expenses” showed up on the tax returns. Under surveillance conducted by the insurance company, it was determined that the dentist was driving several hours at a time to a satellite office, at which he was also the only dentist. This didn’t jive with his claims of being unable to sit for lengthy periods.

SIU Today: How did this case play out?

TC: Despite financial clues indicating that the dentist was working, the insurance company didn’t feel that they had the evidence necessary to make their case. The case was finally solved when the claimant’s ex-wife offered up the second set of books which proved that the dentist was working at full speed.

SIU Today:
From a CPA’s point of view, what is one of the biggest challenges for insurance companies when investigating financial matters?

TC: Sometimes the hardest part of an investigation is requesting the proper documentation. It’s not only important to know what to request, but to know what those documents should look like. Many a fraudster has submitted incomplete or non-responsive documents.

If a claimant is a regular wage earner, the tax returns and W-2 forms should be sufficient to document earnings. In the case of a self-employed claimant, determining earnings gets a little more complex. The most obvious items needed for analysis of the self-employed are the financial statements and tax returns. Monthly or quarterly financial statements can be helpful to demonstrate patterns or seasonality in sales. Annual figures do not give insight into how the business flows throughout the year, so monthly or quarterly financial statements are desirable.

SIU Today: What do you recommend claims analysts and SIU investigators review first?

TC: The first item to examine is the income. Does the income reflect the claims being made? Does the income rise and fall in line with claims about a person’s ability or inability to work? If it does not, are there logical explanations?

Depending upon how a business is set up, there may not be noticeable changes in revenue and expenses. For example, at a doctor’s clinic with several doctors on staff, revenue may stay stable if the other doctors pitch in to see the patients of their disabled colleague.

An examination of expenses will also help determine whether the business has had changes in operations. Some of the expenses that should be abated during a non-working period include travel, cellular phone, supplies, and meals. Other expenses such as rent may continue even if the business owner is not working.

SIU Today:
Can you provide an example of this?

TC: A life insurance agent claimed that severe depression kept him from working, and his doctor said that he might never recover. In spite of this, the agent was still earning significant commissions from insurance companies.

His explanation? His policyholders were so sympathetic to his situation that they were calling him and begging him to write policies. Since the agent didn’t want to disappoint these loyal clients, his assistant processed all the paperwork and secured the new policies. With all of the state regulations surrounding agent licensing and writing policies, this story didn’t hold water.

SIU Today:
What other evidence did you find?

TC: Further evidence of the insurance agent’s work-related activities was found in the business expenses. While the agent was supposedly not working, he continued to incur expenses for telephone, automobile, and travel. Again, a fully disabled agent should not be incurring these expenses if he is not working.

It was very clear that the insurance agent was actively soliciting business, and this was confirmed with videos of him going to and from the office and entertaining clients at restaurants. The agent had his fair share of lame excuses, but in the end it was determined that he was working full-time as an insurance agent.

SIU Today:
The situations we’ve discussed cover life and health claims, but what about property and casualty claims? Are the issues the same?

TC: Yes. Like life, health, and disability claims, the first documents to examine in many property and casualty claims are the financial statements and tax returns. These will provide high-level documentation about the historical and current finances of the business. Again, if financial statements can be obtained for quarterly or monthly periods, these can be helpful to determine trends in sales and expenses.

Oftentimes, it may be necessary to request that sales figures be broken down on a daily, weekly, or monthly basis. The appropriate breakdown will be based upon the type of business and the length of the loss period.

If the insurance claim includes a loss of inventory, then detailed records of inventory will be critical. It is often important to compare historical inventory levels to the amount of inventory claimed in the loss. In addition to determining normal inventory levels, I may also examine typical sales levels of the items in the claim to determine if the claimed loss is consistent with operations.

SIU Today:
Are there other business records which you feel are important to evaluate?

TC: Payroll records may be important to verify periods of shut down. They are also necessary to show normal working patterns, including both slow times and busy times.

Detailed property and equipment records are necessary to verify the existence of fixed assets prior to the loss. The documentation may also be necessary to verify the original cost of the assets. Appropriate documentation of property and equipment purchases includes purchase orders, invoices, and receipts.

SIU Today: Can you provide an example where this type of examination proved valuable?

TC: A theft from the storage room of a liquor store seemed unusual from the start. The store was in a strip mall, and the jewelry store next door was left unharmed. The thieves pulled up to the building with a big truck and loaded up cases of expensive liquor. Security cameras verified the theft.

Only the most expensive brands of liquor were stolen. A comparison of the claim to historical inventory records showed that the number of cases stolen was higher than the sales of those brands for the entire last year.

An examination of a truck identical to the one on the surveillance tape yielded some interesting information as well. Measurements of the inside of the truck showed that the truck was too small to hold the number of cases of liquor that were reported as stolen.

As it turns out, the owner rented the truck for a staged theft. The theft was carried out in plain view of the security camera, which the owner thought would help substantiate his claim. The business was doing poorly and he needed the insurance money to stay afloat.

SIU Today: What are some of the other red flags you see when evaluating financial documents submitted to insurance companies in support of a claim?

TC: There are many general “red flags” that may be found in various types of insurance claims. Some of the more common ones include: Altered or incomplete documentation, conflicting information between various documents, date discrepancies – dates on documentation don’t make sense compared to the date of the incident, expenses continuing during a supposed shut-down and too many suspicious items that are easily “explained away” by the claimant.

SIU Today:
Are there any red flags specific to injury type claims?

TC: Claims for disability, workers compensation, or personal injury might include some of the following red flags of fraud: business-related expenses continue when the person is supposedly not working; hidden income or business interests surface, which the person claims she or he “forgot” about; a new related business is started by the claimant, her or his family, or other associates; income is shifted to family or friends, for example, a previously unemployed spouse now “works” for the business and receives a paycheck; ownership of the business is shifted to family or associates in order conceal the fact that the claimant is actively involved in the business.

SIU Today: What about red flags associated with business interruption claims?

TC: Questionable financial condition prior to the loss, particularly in the case of suspected arson, expenses that should decrease during a plant shut-down, such as electric, don’t show any change.

Other red flags related to the loss of contents or inventory can include: unusual circumstances or unusual items lost, such as only high-dollar items lost; unusual “mix” of items on hand at the time of the loss, compared to normal inventory levels; unreasonable inventory levels claimed, when compared to what the company sold in the past.

SIU Today: Do you have to be an expert to find the hidden clues in financial documentation?

TC: No, the red flags might jump out at an investigator. But if expert analysis is needed, insurance companies often have financial experts on staff or as outside consultants, and they can be a tremendous asset to insurance claims personnel and SIU investigators in analyzing financial documentation.

SIU Today: What value does the financial expert bring to the claims and investigation process?

TC: A skilled and experienced forensic accountant has successfully investigated hundreds or thousands of fraud cases. That direct experience with fraud can add much value to an investigation of a potentially fraudulent insurance claim. They can help during the documentation gathering process, suggesting items to request and evaluating the documents received. The expert can point out the shortcomings in the document production and offer direction on additional documents to request.

SIU Today: Once the analysis is completed, then what?

TC: The forensic accountant will critically examine the financial details of the claim and supporting documentation. The results of that in-depth analysis should be summarized in a report that can be understood by a non-accountant. A good expert will also suggest additional investigative steps to pursue.

While not all insurance matters require the submission of complex financial documentation, working in tandem with a knowledgeable CPA is a particularly effective manner of investigating the ones that do. Their professional analysis may prove valuable in identifying red flags, determining the legitimacy of financial figures submitted and making solid insurance fraud cases. The added financial review has proven valuable to SIU personnel on many occasions.

Daniel W. Draz is an investigator in the Special Investigations Unit at Standard Insurance Company in Portland, Oregon. He is a CFE with 21 years of successful investigative and anti-fraud experience. He is a member of the International Association of Special Investigation Units. Daniel has an M.S. in Economic Crime Management from Utica College in New York (2005) and a B.S. in Criminal Justice from Arizona State University (1985). Daniel writes iFraud, a regular insurance fraud column in Fraud Magazine and is Associate Editor for fraud investigations at PI Magazine. He is an occasional contributor to SIU Today.

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