A current trial alleging arson and insurance fraud provides CPAs an educational read on the fraud triangle.
Consider these articles if you want more background or to see my sources:
- 3/20/17 – MarketWatch – What drives people to arson? Falling house prices
- 1/27/17 – WLWT – Middletown man’s electronic heart monitor leads to his arrest
- 2/8/17 – Washington Post – A man detailed his escape from a burning house. His pacemaker told police a different story.
A fellow woke to fire in his home, packed a few belongings, called 911, tossed a couple suitcases out the window he broke with his cane, then climbed out the window to save his life.
That’s what he told fire officials and his insurance company.
The fully involved fire, which from a photo looks to have destroyed the home, caused around $400,000 of damages.
Technology can rat you out
His pacemaker told a different story.
The data in his pacemaker allegedly said he was wide awake when he claimed to be asleep. A cardiologist hired by the police reviewed the data and told police that it was his opinion the man could not have done what he claimed, given the heart rate and other data recorded in the pacemaker.
My wild guess is that the pacemaker ought to have shown the heart beat instantly going from resting to off the charts, heavy labor for several minutes, and a long slowdown consistent with massive stress wearing off. My further and wilder guess is the pacemaker did not so indicate.
The man was arrested and indicted on arson and insurance fraud charges.
He is awaiting trial. He will have his opportunity to confront all the alleged evidence and challenge each of the investigators. We must await the verdict of a jury before we conclude any criminal acts occurred.
Fire investigators were suspicious as soon as the smoke cleared. According to that WLWT report, investigators (not sure if it was fire or police) allege they found gasoline on the man’s shirt, pants, and shoes.
Also causing suspicion were multiple points of origin for the fire, according to fire investigators. My understanding is a normal fire starts at one specific point and one clear cause can usually be identified, such as this electronic device, or a short in wiring there, or an overturned candle here.
Those suspicions led them to a search warrant to look at the pacemaker data.
Do arson rates increase when housing prices fall?
For CPAs, the MarketWatch article identifies another major factor to consider: When housing prices slide, arson claims increase.
A new study on house fires reports correlation between drops in housing prices and arson rates.
The study looks at what is called the National Fire Incident Reporting System. The data there shows a rate of 6.4 arsons per 1 million residents per month.
The new study shows that when housing prices drop in the range of 10% to 15% for a sustained period, specifically 6 months, then there are an additional 3.8 fires per 1 million residents per month. The article does not give a third data point so we can put the overall arson rate and the increase in residential fires in context to each other.
Separately, the author of the MarketWatch article looked at the ratio of claims paid to premiums earned on homeowner policies for three big insurers. This shows payouts on claims in relation to premiums paid by homeowners. The results are soft from my perception, yet revealing.
The author found that all three companies saw a doubling in ratio of claims to premiums in’08 compared to ’06. There was a noticeable increase in ’07 and a huge jump in ’08.
The big increase in payout ratios would correlate to the collapse in housing prices and the subsequent drop would correlate to a recovery in’09.
Consider this story in terms of the fraud triangle
Now to the lesson for CPAs: Consider this fire story in terms of motivation and opportunity in the fraud triangle.
A dramatic drop in the price of one’s home, perhaps to the point of going far underwater, could create motivation for some people. Combine that with variable interest rates, which could lead to major increase in monthly payments on that underwater house. Research mentioned above suggests drops in housing prices becoming a motivation is a real, statistically measurable factor.
An insurance policy that would generate a nice check if something were to happen could provide opportunity to a desperate person. Combine that with an invalid public perception that arson is difficult to identify and harder to prove, both of which perceptions are not correct.
Only hurdle then left to clear would be a person being able to rationalize that ‘selling’ the house to the insurance company is an okay thing to do. Actually, the ‘sale’ would be to you and me and other policy holders, whose rates would increase the next year. Oh, one would also have to clear the hurdle of concluding that an action which is an obvious felony to you and me is actually not a felony, but is actually quite a reasonable financial strategy. Hey, everyone cuts corners on insurance claims, am I right?
CPAs, as your homework assignment for tonight, translate all the above factors into a case study of cooking the books. For extra credit, translate it into a case study of a controller ‘borrowing’ some money.
Back to the specific case of this fellow with the pacemaker. The MarketWatch article gives us more of his background.
His law license had been suspended.
He is 59 years old.
His own house had been repossessed and he liquidated all his other assets in a Chapter 7 bankruptcy.
My guess is the combination of all those factors leave him with relatively limited opportunities to find a new line of business or to recover financially.
Social security checks are still about 6 years away. I’m sure his retirement funds disappeared in the BK.
Think back a few paragraphs, in case you missed it – he had previously lost his own home.
So whose house did he allegedly torch?
He recently gain control of his mother’s former residence. As a complete shot in the dark, I’ll guess he inherited the house when his mom passed away.
Article says his mom’s house had dropped 20% in price over a couple of years, of which 3% of the decline had been since he moved in.
For CPAs studying at home, add in to the motivation side of the triangle extreme financial distress without an obvious angle to rebuild. Subtract out the huge emotional cost that would otherwise be incurred in allegedly destroying one’s own home.
Making the massive assumption that each piece of information reported in all three articles is true, this story is a good illustration of the fraud triangle.
If you’ve read this far, you will enjoy the MarketWatch article. Hat tip to Francine McKenna (@retheauditors) for pointing me to the article.