Case Study – Lanco Scaffolding

1. Case Study – Lanco Scaffolding • Auditing & Investigation Details • In Slide Show on Derrig.com, PCI Tab and in Handout

2. Case Study – Lanco Scaffolding Lanco Representations • Small scaffolding operation • Limited accounting records • Outside accountant prepared and possessed tax records • Premium of $28,000

3. Case Study – Lanco Scaffolding Audit History • Preliminary audit June 2000 • Owner & other business principals not available at scheduled time • Records left with office secretary • First policy final audit May 2001 • Again limited records provided • Spouse of owner provided records • Everything “in line” with estimates and other representations of Lanco

4. Case Study – Lanco Scaffolding Audit History - Continued • Second policy final audit May 2002 • Mirrored previous audit • No claims to date • Third policy final audit June 2003 • Claim received during policy year • Inconsistencies start to appear • Payroll consisted of four employees • Claimant was not one of them • Auditor kept pushing for clarification

5. Case Study – Lanco Scaffolding Spouse’s Representations • Same four employees for last ten years • No other workers, including no cash labor • Tax returns at accountants, 941’s & 1120’s • No General Ledger - not that sophisticated • Cash Disbursements at accountants • Claimant – Did not know Nephew of owner Did not know how paid Maybe in cash to help out Only one

6. Case Study – Lanco Scaffolding Owner’s Representations • Was not sure he knew the claimant • Later admitted he was his uncle • Only worked several weeks • Signed wage report showing wages back several months (Date employed left blank) • Only one employee paid in cash • Auditor scheduled another visit for additional record review

7. Case Study – Lanco Scaffolding Second Visit • Partial General Ledger for prior period provided • Still no Cash Disbursements records • 23 W2’s – “Thought we only wanted the ‘union’ payroll” • Multiple W2’s for several employees – “Union wouldn’t like them combined” • Audit contact leaves unannounced • The “Oops”

8. Case Study – Lanco Scaffolding SIU Referral • Research conducted • Dun & Bradstreet • US census bureau statistics • Robert Morris Associates ratios • Audit strategy developed • Records to request, review and retain • Questions to ask • Prior policy periods to be revisited • IFB Referral

9. Case Study – Lanco Scaffolding The Accountant’s Tale • Visited on a different insured • Opportunity to seek confirmation • More contradictions • Employment tax returns prepared and filed by Lanco • Did not maintain or possess the cash disbursements • Prepared Corporate tax returns based on P&L provided by Lanco

10. Case Study – Lanco Scaffolding Another Audit • General Ledgers and Cash Disbursements provided • Are they complete? • After review, are they complete? • Prior versions of tax returns compared • Why different? • Last G/L Account – State Withholding? • Any other G/L’s?

11. Case Study – Lanco Scaffolding The “Oops” is played • Why is the “For Cash” account not shown in the G/L? • Why are the checks charged to this account not shown in the cash disbursements? • Asked again why the G/L provided did not include the “For Cash” account. • What is the purpose of the “For Cash” account?

12. Case Study – Lanco Scaffolding The Oops Continued • What is the purpose of the entry, “Cash for guys at jobsite”? • Get who in trouble? • Requested complete printout of the G/L, including the “For Cash” accounts. • Can I exclude the wrap-up jobs?

13. Case Study – Lanco Scaffolding Next Steps • Meeting with IFB • Audit billed including all cash payments without supporting documentation • Additional meetings with Lanco • Meeting with IFB, IRS and FBI • The checks HAVE been in the mail