Beyond the obvious: often, those who commit one fraud have no qualms about continuing the practice. Further investigation into the inner workings of one insurance company leads to a compendium of wrongdoing - Fraud Findings - Column

Internal Auditor, April, 2003 by Courtenay Thompson

THURSDAY, 2:00 P.M., XYZ INSURANCE. Audit Manager Lou Wilcox and Senior Auditor Randy Starr are called to the office of Larry Gabor, vice president of Group Insurance Operations at XYZ Insurance Company.

"We have a problem," Larry says. "We just got a call from Bill Parks in the Eastern Region. He says he can't pay the insurance premiums he owes us.

Lou and Randy exchanged knowing glances. Bill operates Parks Administrative Services, one of several small third-party administrators actually owned and operated by XYZ insurance agents. The agents sell the group insurance coverage to organizations and then enter into agreements with XYZ Insurance to administer the programs.

Bill collects premiums and pays the claims on behalf of XYZ. Historically, this arrangement has been a problem for the company, yet executive management continues to enter into the administrative agreements because they are concerned that, if disallowed, agents will move the policies to competitors.

Although the administrative contracts require agents to place all collected premiums in premium trust accounts, XYZ has never consistently enforced that requirement. It is a common belief among the staff that executive management knows that some agents commingle the premiums with their own finds and use the collected premiums to finance their own operations.

"We knew Bill was having trouble," Larry continues. "Some of his accounts are more than 60 days past due. He was doing all right until he lost one of his big groups. In addition, some of his other groups were having trouble and would soon be due for sizeable premium increases because of their adverse claims experience. That might have caused Bill to lose their business."

"What else do we know?" Lou asks.

"We know he is willing to talk to us right now," Larry replies.

"Let's get over there," Lou says, "before Bill changes his mind."

THURSDAY, 6:00 P.M. Lou and Randy board a plane to see Bill.

FRIDAY, 9:00 A.M., PARKS ADMINISTRATIVE SERVICES. Don Tanner, XYZ's regional marketing vice president, joins Lou and Randy to meet a contrite and embarrassed Bill Parks.

"I don't know how this could have happened," Bill says. "My business was profitable for years. There was always enough to pay premiums when they were due."

Lou and Randy know that like some of XYZ's other agents, Bill was better at sales than administration. His sales skills fueled the growth of his organization, but he never put administrative controls in place to keep up with the growth. It was only a matter of time before his practices caught up with him. Lou and Randy liked Bill, but they knew he often cut corners, skirting the edges of acceptable administrative practices.

FRIDAY, 2:00 P.M. Lou and Randy gather three years of bank statements for Parks Administrative Services and vow to stay through the weekend to determine the amount of XYZ's loss.

SATURDAY, 5:00 P.M. Lou, Don, and Randy prepare schedules of the premiums collected from the various small groups that Parks Services administered, and try to reconcile those to what had been remitted to XYZ. The reconciliation process identifies about $350,000 collected by Parks Services but never remitted to XYZ. Parks' bank accounts contain only $2,500.

MONDAY, 7:30 A.M., HOTEL COFFEE SHOP. Lou and Randy meet with Don to discuss the results of their investigation.

"I want to thank you for a job well done," Don said. "I know you had to put in some long hours this weekend to sort this mess out. We really appreciate it."

Don paused a moment, and then continued. "You know, as bad as this is, it could have been a lot worse. I'm thankful that the loss isn't even bigger."

"When are you heading back to headquarters?" Don asked Lou.

"We don't know yet," Lou said. "We haven't finished all that needs to be done."

"What else do you need, Lou?" Don asked. "You've determined the loss. Surely you aren't going to waste time looking for little problems."

"We are going to spend some more time with Parks Administrative Services records," Lou said. "It is not unusual in cases like this for an agent or administrator to have more than one method of getting funds."

Don bristled.

"I thought we had this all wrapped up," Don said. "Does executive management know what you are up to?"

"Of course," Lou replied.

Lou and Randy felt very comfortable with what they were doing. The mandate from the chief executive officer and the audit committee was to get to the facts in such cases and conduct complete investigations. Their investigative strategy included determining the extent of the loss. This meant exploring other methods that might be used.

FRIDAY, 5:00 P.M. Lou and Randy had a lot more information. Review of the bank account activity and other records soon revealed that Parks Administrative Services had some customers who were not XYZ policyholders.

The auditors decided that the investigation would not be complete without reviewing claims paid by Parks Services. They gained access to Parks Services records of claims payments made. They also got home office records of all claims paid and charged to the policies administered by Parks Administrative Services. From all the documents they gathered, Lou and Randy uncovered the following: