TINY DETAILS TRIGGER RED FLAGS FOR FRAUD
November, 2019 | Nashville, Tennessee | SPF Team Report
Editor’s note: This is part six in our “anatomy of fraud” series about the big changes in Tennessee’s legal and financial landscape.
Series Recap: A Tennessee widow wanted more assets than she had agreed to in her pre-nuptial. She was sworn in as executor of the estate and for over two years worked with her attorney Randle S. Davis, to hide her husband’s
legal and financial records from his children, who were trustees of his estate.
Historically, hiding records is considered fraud, breach of fiduciary duty and often, when done by officers of the court, obstruction of justice. However, in this Tennessee case, Judge James Martin III said these activities are no longer fraud or a breach of fiduciary duty.
Tennessee’s appeals court confirmed Judge Martin’s ruling.
Readers who want to read the series from the start can link here:
SIMPLE DETAILS TRIGGER FRAUD
While millions of dollars in assets remain missing in the Tennessee accounting, new details from the case show that there were small signs of fraud early in the estate process. In the forensic accounting world, these are often called “red flags for fraud.” When spotted, they cause accountants and fraud examiners to dig deeper and look closely at the details of an event.
In the Tennessee case, one of these tiny “red flags for fraud” was easy to see within weeks of the opening of the estate. Court records show that the trustees repeatedly asked for bills from the executor and Davis. But the billing for the administration of the estate was concealed for nearly two years.
Typically, people get paid when they work, so it was odd that for nearly two years, neither the executor nor the attorney billed the estate for work as they did it. That simple break from common practice was “oddity” or “outlier” that triggered a fraud alert.
“The smallest details often unlock the big frauds,” says Katherine Moore. A graduate of Wake Forest, Moore is aCertified Fraud Examiner (CFE) and founding partner at Vector Analytics. She has worked on a variety of cases ranging from fraud the damage recovery settlements for the BP Deepwater Horizon disaster to small estate-fraud cases.
“It’s important to remember that the heartbeat of fraud is deception” says Moore. “In fraud, people hide the truth. Sometimes all you have is one small piece of the puzzle that doesn’t fit: The timing of something or the location of an event that doesn’t fit the story that’s being told. That small detail becomes the red-flag.”
HIDDEN BILLINGS ITEMIZE TENNESSEE FRAUDS
It took nearly two years but once it was delivered, the bills from the executor and her firm, (then called Lassiter, Tidwell, Davis, Keller and Hogan) provided detailed evidence of a long list of frauds.
In one example, an audit revealed a fraud known as bill padding or “churning” by Davis. “Churning” is where clients literally “stir up” or “churn” what appears to be work, and bill clients for “going in a circle” or “make work” hours. In the Tennessee case, there were dozens of hours billed by the attorney to the estate for “research” on the famly’s estate documents which they had already been paid to write. The firm was billing to research it’s own work!
A second, similar fraud was caught in the executrix’s billing: An audit showed that she had billed the estate for three separate trips to the same bank to inventory the same safe-deposit box.
ONE FRAUD UNLOCKS ANOTHER:
Sometimes in fraud investigations, the discovery of one fraud often opens the door to find another fraud.
In the Tennessee case, a third fraud was uncovered in safe-deposit billing: While the executrix had padded her bill for three trips to the bank to inventory the safe-deposit box, she had never delivered an inventory or accounting of the contents of the safe deposit box to the trustees.
Though it took almost two years years for the trustees to get the billing for the estate administration, those bills became a key document that confirmed many of the frauds found in the estate.
Readers must remember that while Tennessee has changed their accounting and fiduciary rules other states have not. Nearly all other state and federal jurisdictions apply the old fiduciary rules of “utmost good faith and transparency” to financial transactions. This extends beyond trusts and estates to include accountings in divorce, child support, bankruptcy, foreclosures, guardianships.
“Always demand regular invoices” says Moore. “Fraud can happen anywhere, so getting regular bills allows clients to monitor what they’re paying for. When you’re kept in the dark, it’s a red flag for fraud that is easy to see.”
If you or someone you know has been the target of fraud in an estate, trust or guardianship, you can contact our volunteers at email@example.com
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