Case Study

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

• Spouses Representations
• Same four employees for last ten years
• No other workers, including no cash labor
• Tax returns at accountants, 941s 1120s
• 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

• Owners 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 W2s Thought we only wanted the union
  payroll
• Multiple W2s for several employees Union
  wouldnt 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 Accountants 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 PL
  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/Ls?

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