Rushing an Insurance Claim

PETER PARILLO

Most business owners spend a majority of their day thinking about how they can improve their business — how they can increase sales, increase productivity, be more efficient and pay the bills. However, for a small percentage of them, the thought process is very different. These individuals care more about how they can personally benefit from the least amount of effort, regardless of how many people are affected. Anthony Grau initially spent most of his time thinking about the right way to grow the business he inherited from his father. Anthony wanted to exceed his father's successes and expectations and was going to stop at nothing to preserve his family's legacy in the wholesale business. Unfortunately, Anthony's ability to grow the business did not match the demands of his lifestyle.

Anthony's parents, Victoria and Phillip Grau, were born and raised in Poland. Shortly after World War II began, they gathered a few of their personal possessions and left Europe for the United States. Soon after arriving in New York City, Phillip, barely 18 years old and with very little education, found a job polishing diamonds in New York City's jewelry district. This was a good job for Phillip since he only knew a few words of English. The weekly salary was low, but Phillip was happy that he was able to bring home some money and support himself and his wife. As the years passed, Phillip learned English well enough to interact with customers directly and build relationships. In 1946, after the owner of the company retired, Phillip used the professional relationships he had created to start his own company, Gold Rush, Inc. The business was modest and at first focused on polishing diamonds, but as Phillip's network grew, so did his business. He decided to begin importing gold and selling it to local retailers and manufacturers.

As Gold Rush grew, Victoria and Phillip welcomed their son Anthony. He began working for his father at a very early age and often spoke of his childhood memories involving the store, such as when he would visit his father and play with gold bracelets and rings. He would place the jewelry on his arms, neck and fingers, pretending he was the king of the world. Anthony's father thought it was so cute that he took a picture and placed it in a gold frame on his desk; it served as a conversation piece when customers came in. After Phillip passed away, the picture sat on Anthony's desk and served as a reminder that he wanted to be king of the world and would do anything to ensure his success.

Second Generation

Anthony did not have a college degree or take any business courses, but he was a businessman who loved to wheel and deal. Unlike his father, who established deep relationships with vendors and was comfortable that any deal presented to him was a fair one, Anthony almost always negotiated. He hardly ever took the first deal and frequently demanded better terms from vendors. The majority of the time, vendors did give him a better price. Anthony knew that a fortune could be made buying and selling gold and that the more gold he had, the more he could sell for a bigger fortune. Unfortunately, Anthony's credit limit prevented him from buying as much inventory as he wanted. But that would soon change.

For any business, it is not uncommon to have a line of credit with a financial institution for general business purposes. In the case of a jewelry wholesaler, a line of credit is used mostly to purchase gold or precious stones and on occasion for labor purposes (e.g., setting precious stones into prefabricated gold jewelry). In the wholesale jewelry industry, a line of credit is especially important during the holiday season. Purchasing gold for the holidays can begin as early as September, and a saying in the jewelry district during the holidays is “He who has the most gold is king.”

Anthony realized that if he was to continue growing his business, he needed more gold. After speaking with advisors, he decided to take out a line of credit with a financial institution. This would allow him to purchase more gold and, better yet, secure the line of credit with the purchased gold. Anthony set up an appointment at a financial institution on the corner of Fifth Avenue and West 40th Street. Fortune Bank was a major creditor in the jewelry district and had the process down to a science. Anthony provided the bank with financial records and a business plan, and within a few days Gold Rush was approved for a $1 million line of credit. Anthony was excited and was eager to put it to good use. What he did not fully understand when he agreed to the line of credit was that Fortune Bank was going to hire an independent company to perform a monthly inventory count. In addition, Gold Rush would need to pay for that inventory count.

Within the first few days of receiving credit, Anthony purchased more than $500,000 worth of gold. He was buying from any supplier he could place an order with and selling the gold to retailers at a profit in just a few days. Anthony was finally running the business the way he envisioned.

Shortly after the loan was approved, the loan officer at Fortune Bank assigned the monthly inventory review to NewBridge CPAs, an independent firm specializing in gold inventory counts. NewBridge, where I was employed, was a small firm located near Fortune Bank, and the two companies had a long working history together.

Working at NewBridge had many positive points. Granted, the prestige did not compare with a Big Four company, but the diversified experience was second to none. As I began scheduling client visits for the weeks ahead, I saw an email asking the auditors if anyone could perform Gold Rush's monthly inventory counts. I recently had a new availability in my schedule, so I quickly volunteered. I obtained the contact information and account details and called Gold Rush.

“Gold Rush, what?!?” a man barked out.

“Hello, can I speak to Anthony?” I responded.

“Who is this? What do you need?”

I introduced myself and explained that I was calling on behalf of Fortune Bank and was scheduling an inventory count.

“Well, I'm Anthony, and I didn't agree to any inventory count!”

I explained that it was part of his agreement with Fortune Bank and that he should contact the bank directly to confirm.

“I will,” Anthony snapped as he hung up.

I quickly thought that I might regret volunteering to take on this client.

Unwelcoming Client

After a few days I called my contact at Fortune Bank, Lori Rizzo. Lori was a no-nonsense loan officer who played by the rules. If a debt covenant failed on one of her loans, she acted immediately. I explained the situation to her, and she began to laugh.

“Yes, I know all about it. I explained the inventory clause to Anthony, and he was not happy. Regardless, I told him that if it does not get done, I will be forced to call the loan,” Lori told me.

“What did he say?” I asked.

“Let's just say he had a change of heart. You should not have a problem scheduling a count, but if you do, call me immediately.”

After I hung up with Lori, I called Anthony.

“Gold Rush, what do you need?”

Nervously I responded, “Hello, Anthony. It's Peter from NewBridge, how are—”

“Yeah, I know, you need to come in,” Anthony interrupted. “Come in on Thursday before three o'clock,” he said as he hung up.

As I sat at my desk with the phone to my head listening to a dial tone, I wondered if this was a joke.

Thursday arrived, and I prepared the documentation for the inventory count. The paperwork was straightforward and consisted of an Excel spreadsheet that automatically calculated gold value based on total weight and current market value. As I began my ten-block walk to Gold Rush, I practiced my introduction and explanation as to why the gold count was required. This would help me if Anthony began complaining that the count was taking too long. When I arrived at Gold Rush, I rang the bell and waited for a response.

Suddenly a voice yelled out, “Yes!”

“It's Peter from NewBridge,” I replied.

A loud buzzer sounded and the door opened. I entered the office and was immediately greeted by Anthony. Not what I expected, Anthony stood about six foot six and was very thin. The clothing he wore looked five sizes too big; he reminded me of a kid playing in his father's wardrobe. In addition, he looked as if he had just woken up, with his hair in disarray and an unkempt beard.

“Hello, happy to meet you,” Anthony said as he reached out to shake my hand.

“Hello, Anthony, happy to meet you in person too,” I replied.

As I followed Anthony to the inventory bins, he stopped and asked, “So, how much gold do you need to count?”

Not sure what he meant, I just looked at him with a confused look.

He then continued, “What I meant is, you don't need to count everything, do you?”

Knowing that my response was not going to be what he wanted to hear, I decided to answer his question differently.

“Why do you ask; is there something you want to tell me before I begin?”

“No, not at all,” Anthony quickly replied.

He then introduced me to the inventory clerk. “This is Ralph Joseph, RJ for short. He will be assisting you with the inventory count.”

Anthony returned to his office, and RJ and I began the inventory count. Bin by bin, we documented and weighed each item by style number. Within the first hour Anthony checked in to see how it was going.

I told him it was fine so far and added, “The first time usually takes the longest since this is the initial documentation. It should be more efficient going forward.”

I explained the process to Anthony, detailing that the two major drivers to the review were the cash balance at the bank as of the day of the inventory count and the amount of gold on hand.

We completed the count in three hours, and the initial calculation revealed that the inventory level was insufficient. I asked RJ if there was any additional inventory, but he just shrugged his shoulders.

“Let me ask Anthony,” RJ replied.

After a few minutes, RJ returned with Anthony.

“How much are you short?” Anthony asked.

Knowing that he was looking for a specific amount, I responded, “The calculation does not work that way; it is based on outstanding balance on the day of the inventory count and total inventory level on hand.”

“Well, I still have old gold that is being smelted. That is a few pounds and should be enough. I have to pick it up tomorrow. Come by first thing and I can show you.”

Reluctantly I agreed. I noted the finding in the work papers and left the office. Early the next morning, I returned to Gold Rush. As I entered the office, Anthony greeted me with “Good morning, the stuff is behind you.”

I turned and noticed a dolly with three large plastic containers on it.

I immediately asked, “I thought it was going to be smelted?”

“I have to return it to the smelter after you look at it,” Anthony snapped. I was expecting to count one-ounce gold bars, which would have made my visit easy, not three large containers. I took out my computer and opened the containers and began counting.

Almost immediately Anthony became enraged. “What are you doing!?” “What do you mean?” I asked. “I have to document the inventory.” Rubbing his head, Anthony grumbled, “This is going to take forever.” After an hour, I was able to document the items in the containers and noticed that it did not match what I counted the previous day. This gave me peace of mind that Anthony had not tried to pull a fast one. Also, the calculation revealed that the inventory on hand was adequate in relation to the loan balance outstanding for the month.

I turned to Anthony. “Okay, all good, see you next month.”

“Can't wait,” Anthony responded sarcastically.

Spending Spree

The following month, I prepared for the second count. I noticed that Gold Rush's outstanding balance on the line of credit had doubled. I immediately thought: Great, I need to spend more time at Gold Rush counting gold. I scheduled the inventory count with RJ and arrived onsite. When I entered the office, I was greeted by Anthony, looking very different from when we first met. He was dressed as if he was preparing for a photo shoot, sporting an expensive suit, tie and shoes.

Taken aback, I shook Anthony's hand and said, “Hello, Anthony, special occasion?”

“No,” he replied. “I decided to treat myself a little.”

Anthony then screamed, “RJ, Pete is here. Let's get this thing over with.”

RJ emerged from the back of the office smiling and led me to the inventory bins.

I couldn't help but ask, “Hey RJ, what's up with Anthony? When did he turn into a model?”

RJ laughed and said, “Two weeks ago he and his wife went out and spent over $25,000 on designer clothes.”

“You must be kidding me,” I said in disbelief.

“That's not all. Anthony went and bought himself a $200,000 car last week and is going on an expensive vacation next month.”

“Is this normal for him?” I asked.

“No,” RJ said. “I've known Anthony for seven years, and he is cheap. This is different.”

When RJ and I finished counting the gold in the bins, again the inventory level was insufficient. Anthony immediately jumped in. “I know, you think we're short again. Come tomorrow and I'll pick up the rest from the smelter.”

Reluctantly I left the office and returned the next day to find a dolly holding four plastic bins filled with gold pieces. After counting it, the inventory level was sufficient, but not by much.

December is one of the busiest months in Manhattan. Tourists flock to the city to take in all of the sights and sounds of the holiday season. Rockefeller Center is the epicenter of it all, and around the corner is the jewelry district. Both locals and tourists window shop for gifts in the jewelry district as store owners battle one another to attract patrons. As the holiday season hit its peak, so did the line of credit for Gold Rush — Anthony had nearly exhausted it. I had assumed that he would dip into the credit to get through the holidays, but I was not expecting him to use the entire amount. I called Gold Rush and, for the first time, RJ answered. I immediately thought, What a pleasant surprise.

“Hi, RJ, it's Pete. I need to come in to perform the monthly inventory count. When are you available?”

RJ informed me that Anthony was away and would not return until Monday. I pointed out that, in addition to the holiday madness, the news was tracking a nor'easter that was on target to hit us over the weekend. If the predictions were accurate, the city was going to come to a standstill come Monday. I was able to convince RJ to let me complete the count the next day rather than waiting for Anthony to return.

The next day, the newspaper headlines were focused on the nor'easter, each one with a witty comment on how the city would be affected. As people prepared for the storm, I prepared for the inventory count. When I arrived at Gold Rush, the snowfall was well under way. I greeted RJ and we quickly began the count. Again the inventory was short. I asked RJ if there was any other inventory elsewhere, but he said no. Looking at the calculation and then out the window, I noticed that the snow was intensifying.

“Are there any plastic bins with inventory?” I asked.

“No, Anthony didn't tell me to go get anything from the other place,” said RJ.

Thinking that I miscalculated in my haste to complete the inventory count, I decided it would be best for us both to head home before we were snowed in.

The following day, New York City was covered with snow and ice. The storm crippled the city, and mass transit was at a standstill. It was impossible to get into or out of the city. Luckily it was a Friday, and most people were happy to turn the snow day into a three-day weekend. Shortly after realizing that there was nothing on the television during the daytime, I began to think about Gold Rush's inventory calculation. It was a calculation I performed several times, and the result always supported an adequate inventory level. This time it did not. I opened my laptop and began looking at the supporting documentation. Everything was in order, and my calculation was correct. Gold Rush did not have enough gold on hand to support the loan. I wondered why the inventory was so low and what RJ meant when he said, “Anthony didn't tell me to go get anything from the other place.”

The Robbery

The following Monday, the city was slowly getting back to normal. Huge piles of snow lined the streets and covered cars. When I finally arrived at the office, I had three voicemails. The first message was from Anthony on Thursday evening. He sounded a little flustered and simply said, “Peter, please call me immediately.”

The second message was also from Anthony, this one on Friday. “Peter, I called you yesterday, I guess you did not come in today because of the snow. I need to speak to you immediately regarding the gold count.”

The third message was left at 6:00 a.m. Again, it was Anthony. “Peter, please come to my office as soon as you can.”

I had not even removed my coat, so I picked up my computer bag and headed to Gold Rush. When I arrived, Anthony was speaking to RJ, and RJ did not look happy.

I overheard Anthony say “Stay here and let me handle this.” Anthony, again dressed to the nines, walked toward me and said, “I was robbed.”

“Good morning,” I replied. “What do you mean, you were robbed?”

Anthony explained that someone must have entered the office during the storm and stolen the inventory that was stored in the plastic containers.

“I already called the insurance company and told them what happened. They are sending someone today to take a look.”

Anthony grabbed my arm and walked me toward his office.

“Personally, I think RJ took it,” he whispered.

Not knowing how to proceed, I told Anthony, “Let's see what the insurance company says first.”

As I walked toward the exit, RJ came over and opened the door for me.

“See you later, RJ,” I said walking by him.

“Okay, see you later,” he replied.

Suddenly he handed me a piece of paper and walked away. As I made my way out of the building, I looked at the paper. It only had a telephone number on it. I walked into a nearby coffee shop and dialed the number.

“Hello, Pete?” a voice asked.

“Hello, who is this?” I replied.

“It's RJ. I need to talk to you. Can you meet me tonight at seven o'clock in the coffee shop on the corner? You know the one I am talking about?”

I laughed and said, “Yeah. I am standing in it right now.”

I returned to my office and waited for seven o'clock. Fifteen minutes prior to seven, I left the office and made my way to the coffee shop. I was very nervous, speculating on what RJ would tell me. When I walked in to the coffee shop, RJ was waiting in the corner. I walked over and sat across from him.

“How are you, RJ? What's up?” I asked.

“Not good, Pete, not good,” RJ responded. “The gold does not belong to Anthony,” he added.

“What do you mean?”

“Well, when you come to do the inventory count, Anthony calls a friend of his up the street and asks to borrow gold from them. After the count is done, I would bring the inventory back,” RJ explained.

At that point, many thoughts whirled through my mind. What should I do next? What if Anthony is right and RJ did steal the gold, and this was just a cover-up? What if somehow I was to blame if RJ is right?

“Where did you go get the gold?” I asked.

“The name of the company is Aztec,” RJ replied.

Not knowing how to proceed, I told RJ not to tell anyone that we spoke and headed home.

The next morning, I called Lori and told her what transpired. She was not happy. I told her the name of the other company and she began to laugh.

“That's our client too,” she said.

“Great, can I get the file?” I asked.

“I'll send it shortly.”

Within a few hours, I had the Aztec file and immediately accessed the gold inventory spreadsheet. Since the format was identical to the Gold Rush spreadsheet, it was very easy to perform a search. I searched for the first inventory item I listed from the containers, a match. I immediately set up a spreadsheet listing the identical items. Almost all the items listed on Gold Rush's inventory were also on Aztec's inventory. Anthony lied about his inventory and, even worse, another client of Fortune Bank was involved.

I called Lori, who said, “Send me the file and I will call Anthony and have him come in for a meeting. I will let you know when.”

A few days passed and all was quiet until one morning when I arrived at work and noticed I had a message. It was Anthony. “Hey, Pete buddy —”I wondered when I became his buddy. “I just deposited the check from the insurance company, so there should be no issue now. Please call Lori and tell her all is well now. Thanks.”

I did call Lori, and I informed her that Anthony deposited a check that he received from the insurance company. “Well, that just made things a lot worse.” Lori stated. “Anthony is avoiding me, but I have a way of getting his attention; I am freezing his account to protect the bank and I will let him know that if we do not meet with him this week, we are calling the loan.”

The following day I received a call from Lori. “Anthony will be at my office in two hours; come by now to prepare.” I gathered the paperwork and schedules I had prepared and reviewed with Lori and headed to the bank. Once I arrived, Lori greeted me and invited me into her office.

“Let me do all of the talking,” Lori said.

After an hour of idle conversation, a voice echoed through the phone, “Lori, Anthony from Gold Rush is here.”

“Let him in,” Lori replied.

Lori stood up and greeted Anthony at the door. “Hello, Anthony, take a seat.”

“I don't know why we are having this meeting; I have enough money in my account to meet your stupid requirements,” Anthony said.

Lori leaned forward and looked Anthony in the face. “We have an issue, Anthony. An issue that has grown much larger since you filed a false insurance claim.”

“What? Are you crazy? I am going to get my lawyer and —”

“And what, Anthony? We know about Aztec and we know that you borrowed the gold from them to meet the requirements of the loan.”

Anthony's face grew pale as he leaned forward in his chair. “This has to be a lie,” he muttered.

Lori then asked me to explain what I found. As I described my findings, I knew that he was not listening to a single word I was saying. Anthony stared at me, not at the spreadsheet I handed him.

He got up and quietly said, “I want to speak to my attorney before I say another word,” and began walking out the door.

“Just so you know, Anthony, I called the insurance company and I have a meeting with them tomorrow morning,” Lori said. “Also, your account with us is frozen as per the agreement.”

Anthony did not say a word as he left the office.

The following day, Lori and I met with Matthew, a representative from the insurance company, and I explained the findings once again. Matthew reviewed the documentation but had very few questions. I wasn't sure if it was company policy or just shock. I forwarded the work papers to Matthew as requested, and that was the last I heard from him. I assumed that the insurance company interacted directly with Lori.

The Rush Ends

A few months later, I had a meeting at Fortune Bank and stopped by Lori's office to say hello. Lori was on the phone as I poked my head in. I could hear her voice clearly as she dictated precisely to the person on the other end what she wanted. Again I thought, This lady is no nonsense.

“Pete, come in,” I heard her yell.

“Hello, Lori, how are you?” I asked.

“Good so far. I guess you want to see if I had an update on Gold Rush.”

“Well, yes, but if you can't I understand.”

“Pete, I am grateful that you brought this to my attention immediately. Let's just say that because of you we only lost $125,000. It could have been much worse if we waited another month or so.”

“What happened to Anthony and RJ?”

“What I was told from the insurance company is that they interviewed Anthony and he came clean regarding how the money was being used. Anthony explained that he started out with buying new clothes for himself and then for his family. That then led into him spending money on a new car for himself and his wife. That was only the beginning,” Lori said.

“I guess having that much money at your fingertips is tempting.”

“After Gold Rush closed up shop, RJ went to work for another wholesaler, but he provided a lot of information before he left.”

“How so?” I asked.

“RJ gave us insight into Anthony's spending habits. He explained that Anthony loved to brag about his luxurious vacations, membership in a country club, and impromptu gambling trips.”

“Anthony felt as if the money was his personal piggy bank,” I replied. “Any punishment for his actions?”

“Anthony has really good attorneys, and I am certain that he will spend every dollar he has left making sure he does not go to jail. Personally, Anthony losing his family business as well as the respect of his family and friends might be worse than any jail time,” Lori replied.

As I started to get up out of the chair, Lori stopped me. “Pete, I have to say that if it wasn't for you continuing to ask questions and following up, we would be much worse off. Anthony panicked, and his only way out was to say the gold was stolen.

“His lifestyle got too big for his income to support, and unfortunately he thought Fortune Bank and the insurance company were going to subsidize his lifestyle,” she added.

I nodded and continued to leave.

“As a reward, I am giving you first choice of all new accounts we get,” Lori stated, smiling.

“Gee, thanks, Lori. I am honored,” I replied sarcastically.

About the Author

Peter Parillo, CFE, CPA, CBM, CFF, CGMA, currently leads the internal audit department for a publicly traded company in New Jersey. Mr. Parillo has more than 25 years of audit experience, including 15 years' experience conducting fraud investigations. He resides in Freehold, New Jersey, with his wife, Lori, and two children, Victoria and Peter.