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

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

2. 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

3. 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

4. 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.

5. 1-2 Fraud Triangle Incentive/Pressure Opportunity Rationalization/Attitude (Weak Internal Controls) (justification or “owed”)

6. 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

7. 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.

8. 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

9. 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

10. 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.

11. 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?

12. 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

13. 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.

14. 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

15. 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.

16. 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.

17. 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

18. 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

19. 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

20. 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

21. 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?

22. 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

23. 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

24. 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