We have a story to tell you. Stop us if you have heard this one ...
A widow can no longer take care of her finances and estate due to old age. One of her children accepts the responsibility of handling the estate's finances. Over time, the estate's assets are fraudulently depleted and funds are no longer available for the care of the woman and expenses of the estate ... what's that? You have heard this before? Unfortunately, this tale turns into reality all too often with the typical victims being elderly or disabled individuals. As financial investigators, we deal with trust and estate fraud cases several times each year. While some may be straightforward, it is important to understand the evidence needed to identify and prove misuse of trust assets.
Back to Our Story
In this particular case, our client was the elderly woman's daughter who was one of the beneficiaries of the trust. Her brother, also a beneficiary, served as the trustee. Our client provided us with an electronic copy of the general ledger that was "creatively" prepared by her brother. She knew her brother had been misusing the funds and figured the general ledger would show us all we needed to see. After a thorough review of the accounting file provided, it appeared squeaky clean. All income was recorded correctly and the expenses appeared consistent with that of an elderly woman. We informed our client that third-party documentation would be needed to see the true nature of the transactions.
Once provided with the monthly financial account statements for the trust, it became clear. Her brother had been diverting trust funds to his personal bank account and recording the transfers as legitimate expenses for his mother. Just as important was obtaining his personal bank records which revealed his use of the funds to support an extravagant lifestyle for himself rather than providing care for his own mother.
Financial Records Are as Good as the Information Provided to the Preparer
For example, tax returns oftentimes are only as accurate as the information provided by the client. Likewise, general ledgers from accounting programs are only as accurate as the preparer may want it to be. Accounting records and reports are used to conceal fraudulent activity such as miscoding or failing to record certain transactions in the accounting program to hopefully conceal fraud.
In the world of financial investigations, it is all about source documents, source documents, source documents. To effectively root out allegations of fraud, you should focus on obtaining source documents such as:
- Financial account statements inclusive of cancelled checks and potentially deposited items depending upon allegations
- Signature cards for financial accounts
- Invoices and receipts to support disbursements
- Loan documentation inclusive of detailed reports showing proceed disbursements and payments
The list above is not meant to be exhaustive, but demonstrates the records that are typically necessary to at least get started with a financial investigation of possible misuse of trust assets to either refute and/or support allegations of fraud. Trustees and accounting records may lie, however source documentation will tell the truth. Fraud has nothing to fear except the truth. If you are finding it difficult to obtain source documentation through discovery directly from the opposing party, be skeptical and search for the truth.