TRAIL OF EVIDENCE
Although the suspicion of fraud can rest on circumstantial evidence, proving fraud requires direct evidence. Bank statements, credit cards, loan applications, estate planning documents, brokerage accounts, life insurance policies and tax returns are common sources of information.
When looking for fraud or misallocation of funds, examine the general ledger and financial statements, tax returns, incorporation and partnership paperwork, receipts from suppliers and vendors, as well as employee records. Fraud examiners often search through thousands of pages to put together a case.
Investigations often use electronic data. There has been a surge of subpoenas in the last decade that have allowed authorities to review hard drives and handheld devices in both homes and offices. Cellphones, GPS systems and tollbooth receipts can provide a trail of someone's travels. ATM withdrawal locations are also recorded. Social media websites are the most recent places to search for evidence.
Advisors can also help prevent fraud by following certain sound practices. The more autonomy clients give others over their assets, the more opportunity someone will have to overstep their moral boundaries. If someone believes they will not be caught, they are much more likely to commit the indiscretion. Deterrence is the No. 1 protector of assets being squandered or moved.
One best practice is to avoid situations where one spouse will sign a tax return without reading it. Clients should never be asked to sign papers that are put in front of them without understanding what they are signing. An advisor should review and explain everything. An advisor can also encourage families to have an annual meeting just like a business. Such meetings should include as many family members as possible so that many members understand the financial picture.
As guardians of your clients' financial assets, you're at the front lines of detection. It is never easy to know when to raise an alarm, or how to respond to clients' concerns or when to bring in outside experts to track down potential trouble. But your clients will be grateful for your diligence and preparedness.
Peggy Tracy, owner of Priority Planning in Wheaton, Ill., which focuses on divorcing clients, is a CFP, CPA, certified divorce financial analyst and certified fraud examiner.