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

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

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

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

Opportunity

Incentive/Pressure

Rationalization/Attitude

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(Weak Internal Controls) (justification or “owed”)

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?

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 Poor physical access controls

Poor operational (or not functioning) controls

Lack of formal job descriptions

Inadequate separation of duties

Inadequate supervision

Poor Management

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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

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.

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

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 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:

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

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

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

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

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

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

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

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

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 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