Forensic Accounting Can Find a Paper Trail – Even Without One
by Danielle Gardiner, CPA, CFF
A common impact of Wildfires is the obliteration of physical records, leaving policyholders unable to provide precise financial documentation. In these instances, insurers, and the consultants working on their behalf, must adopt alternative methodologies to estimate losses effectively.
Indexing and Correlative Analytics
Indexing utilizes regional economic data, industry performance indicators, and established benchmarks to project losses. Correlative analytics employs statistical models to analyze secondary datasets, such as:
- Sales data from comparable businesses in unaffected areas.
- Historical revenue trends tied to seasonal or industry-specific patterns.
- Consumer spending reports from adjacent markets.
For example, if a vineyard loses its harvest, insurers can analyze wine production indices, weather conditions, and regional export data to estimate lost revenue.
Out-of-Sight Inventory Valuation Techniques
When Wildfires create a scenario of both out-of-sight inventory losses and the loss of inventory records, some estimation methods, include the following:
- Historical Purchase Analysis: Reviewing supplier invoices to approximate inventory levels at the time of the fire.
- Physical Trace Assessment: Examining remnants, such as warehouse blueprints or storage photographs, to infer inventory quantities.
- Market Valuation: Utilizing current market prices to estimate the value of lost goods.
Third-Party Verification
Collaboration with external stakeholders can provide secondary evidence to support loss calculations. For instance, shipping records from logistics providers might confirm inventory movement before the disaster. Additionally, trade associations and suppliers can offer critical data to substantiate claims.
Leveraging Industry Anchoring Data
Drawing on over 30 years of industry experience, it is evident that even in today’s cloud environment, obtaining complete data sets post-fire remains a challenge. One effective approach involves anchoring loss calculations to industry-specific data. Tools such as profit margin benchmarks and business indexing products provide:
- Average profit margins within the sector.
- Industry-standard ratios of revenue to expenses.
- Comparative performance metrics from similar businesses.
These resources create a reliable framework for approximating the financial performance of affected businesses.
The Role of Tax and Government Records
When physical records are destroyed, government and tax documents can serve as vital corroborative tools. IRS transcripts, for example, validate reported revenue, expenses, and profitability, offering a basis for loss calculations. Additional sources include:
- Sales Tax Remittances: Reflecting historical revenue patterns.
- Payroll Tax Records: Providing insights into workforce size and associated costs.
- Property Tax Valuations: Offering benchmarks for asset values.
Behavioral Analysis During Claims Investigation
Interviews with the insured can provide valuable insights into the legitimacy of claims. Behavioral cues such as nervousness, hesitation, or overly complex narratives may indicate potential issues. Best practices for insurers include:
- Asking open-ended questions to gauge the policyholder’s understanding of their business.
- Observing non-verbal cues, such as fidgeting or avoiding eye contact.
- Cross-referencing verbal accounts against available data.
Lessons from the 2018 Camp Fire
The 2018 Camp Fire in Paradise, California, stands as one of the most destructive wildfires in U.S. history. With 85 fatalities, over 18,800 structures destroyed, and total economic losses estimated at $16.5 billion (including $12.5 billion in insured losses), it highlighted the critical need for robust claims validation processes.
Fraudulent claims emerged as a significant challenge. Some businesses overstated their losses, while others fabricated inventory claims. A notable example involved a small retailer claiming $1 million in lost inventory, despite tax records indicating annual sales of only $500,000. Forensic accountants uncovered discrepancies by:
- Analyzing pre-fire supplier invoices.
- Interviewing employees and suppliers to verify operational capacity.
- Using regional retail sales data to estimate plausible inventory levels.
These investigations not only reduced inappropriate payouts but also underscored the importance of meticulous oversight in mitigating fraud.
To learn how Ampcus Forensics can help your clients recover faster, contact us at info@ampcusforensics.com or submit a New Assignment