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
1-2
(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
7-5
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