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Vol. 3, Issue 2, Special Issue, 2011
Dr. Sterling’s Disability Insurance Claim: A Case Study
**Diane M. Matson Wen Yu ***
This is the case of Dr. Albert Sterling, a fictitious surgeon who has submitted a disability income
claim to Guardian Protection Insurance Corporation, a fictitious insurance company. Dr.
Sterling is making a disability claim, stating that he cannot continue to work as a surgeon, due to
debilitating depression. While the doctor and the insurance company are fictitious, several
aspects of this case are real.
Students assume the role of an insurance investigator who is assigned to assess the validity of the
claim. The case is divided into two phases, Phase 1 and Phase 2. Phase 1 contains most of the
information and questions, and requires most of the analysis. Phase 2 contains six additional
sources of evidence, and allows for a more in-depth investigation about the validity of the claim.
Phase 1 is effective by itself, but Phase 2 shows that a fraud investigation usually proceeds in
stages, with information coming in at various times.
This case provides an opportunity to practice forensic accounting techniques in the specific
context of disability insurance. Students will find several “red flags of fraud” to investigate.
Tracy Coenen, CPA, CFE, and insurance investigator, notes: “For insurance claims that deal
with illness or injury, such as workers compensation, disability or personal injury the key to
finding red flags of fraud is looking for financial information that doesn’t add up or is
inconsistent with the claims submitted” (Drax, 2006).
The sections of this paper are as follows: Applications; Features; Implementation; Case (Phase
1); Suggested Solution (Phase 1); Case (Phase 2); Suggested Solution (Phase 2); and Conclusion.
- (^) The authors are, respectively, Associate Professor and Assistant Professor both at the University of St. Thomas.
Vol. 3, Issue 2, Special Issue, 2011
Applications
This case is appropriate for a forensic accounting course at the undergraduate or graduate level.
We have primarily implemented this case in the advanced auditing course in our Masters of
Science in Accountancy (MSA) program, which includes significant coverage of forensic
accounting and fraud investigations. This case was tested and found effective in three sections of
this course. We have also provided this case in independent studies in forensic accounting to
both undergraduate and graduate students many times, and received positive feedback from these
students.^1
Features
Several features of this case may be of interest to instructors. These features include the
development of analytical skills in a specific context, the focus on where funds are spent, and the
search for additional information.
Use Analytical Skills in a Specific Context. This case is set in a specific context, the insurance
industry, where accounts, amounts and relationships are of particular concern when viewed in
the light of a disability claim. This case encourages students to develop their analytical skills, as
they will identify accounts, amounts and relationships that do not make sense for a high-earning
individual and his family. For example, students should notice that Dr. Sterling has taken a loan
against his pension, which may seem surprising for a high-income person to do. In addition,
students are provided two guidelines or “rules of thumb” commonly used in determining the
validity of disability claims. When students investigate the relationship and patterns with a
specific purpose in mind—determining the validity of a disability claim—they should find that
Dr. Sterling has not built up his net worth as much as would be expected. Students can transfer
such analytical skills to other types of fraud investigation cases, even at a corporate level.
(^1) The university at which the authors work does not currently offer an undergraduate forensic accounting course in
the regular curriculum, due to the time constraints of the other required accounting courses.
Vol. 3, Issue 2, Special Issue, 2011
would be useful, and what documents would be relevant. For instance, to learn more about the
family’s spending, they could request bank statements, and to learn more about the value of the
home, they could ask for an appraisal report.
Implementation
In an undergraduate or graduate course in forensic accounting, this case could be given after the
basics have been covered, such as types of fraud, the fraud triangle, and different types of
investigative techniques, such as the net worth analysis, the expenditures method, and the bank
deposit method. In an advanced auditing course, this case could be given at the end of the
forensic accounting coverage.
The case could be assigned as an individual or a team assignment. Because the case is not
particularly lengthy, Phase 1 could be handed out at the end of one class and be turned in or
covered in the next class. If Phase 2 is used, that could be due in the subsequent class.
This case can serve as a written assignment or a class presentation (or both). Students could
prepare the answers in writing and turn this in as an assignment. Or, they could be ready to
present their findings in front of the class. We have tested it as an assignment to be presented by
selected teams in front of the class (advanced auditing), as an individual assignment to be
prepared with written responses (independent studies in forensic accounting) or as part of a
midterm exam with handwritten responses (advanced auditing).
Please note that there are many details in disability insurance policies that are not covered in
class or in this case. These details include renewing policies, canceling policies, raising
premiums, starting benefits, paying during recovery periods and establishing the length of
benefits. We attempt to provide enough background information on disability insurance to make
the context understandable, without adding complexities that are irrelevant to the case.
Vol. 3, Issue 2, Special Issue, 2011
Case
Phase 1
This case asks you to apply your forensic accounting skills to a specialized area of forensic
accounting, insurance fraud. In particular, you should consider the possibility of a fraudulent
claim for long-term disability insurance. The Background Information provides a brief
description of disability insurance. The Disability Insurance Claim Information gives details
about the policyholder’s claim and financial condition. In the Questions for Phase 1 , you will
identify and discuss issues and concerns you might have as an insurance fraud investigator.
Background Information
Disability insurance, also known as disability income insurance, provides income if a person is
unable to work. This form of insurance protects the earned income of the beneficiary (the
insured policyholder). A disability policy protects income against the risk that disability will
make working (and therefore earning) impossible. Such a policy is designed to pay for living
expenses if the policyholder becomes unable to work due to accident or illness. There are
several sources of disability insurance, including federal government social insurance programs,
employer-supplied disability insurance, and state-run workers’ compensation benefits. In
addition, policies can be sold and issued to individuals through insurance companies, which is
applicable in this case.
There are two types of disability policies: Short-Term Disability (STD) and Long-Term
Disability (LTD). STD policies typically take effect after 14 days of disability and may extend
for two years. LTD policies usually take effect after several weeks of disability and may provide
benefits for a few years, to the time when the person can collect social security payments, or
even the remaining years of the person’s life.
Disability insurance policies differ in the definition of “disability.” One definition views the
disability as a condition that prevents the person from performing the major duties of his or her
chosen occupation. So, if a person cannot perform the main duties of his or her chosen
Vol. 3, Issue 2, Special Issue, 2011
- The combined federal and state individual income tax rate is approximately 40%.
- Dr. Sterling states that he has been suffering from debilitating depression recently. He has filed a claim for long-term disability insurance, asserting that he cannot continue to work in his profession, as a surgeon.
- Dr. and Mrs. Sterling’s personal financial statement (Personal Statement of Net Worth/Balance Sheet) has not changed significantly since the policy was issued in December of 2005. Copies of the Personal Statements from December 31, 2005; December 31, 2006; December 31, 2007; and December 31, 2008 are in GPIC files. The Personal Statement for December 31, 2009 is provided next.
Vol. 3, Issue 2, Special Issue, 2011
Dr. and Mrs. Albert Sterling Personal Statement of Net Worth/Balance Sheet As of December 31, 2009
Assets
Cash $10, Automobile 50, Personal Property 60, Boat 100, Collectables 350, House 600, Pension 210, Interest in Professional Corporation 1,200,
Total Assets $2,580,
Liabilities
Automobile Loan $25, Home Mortgage 400, Pension Loan 15,
Total Liabilities $440,
Net Worth = Total Assets - Total Liabilities $2,140,
Under federal penalties of perjury, I do swear and affirm that the information provided above is true and correct to the best of my knowledge and belief.
Signed: Albert Sterling, M. D. Date:^ January 15, 2010
Vol. 3, Issue 2, Special Issue, 2011
Suggested Solution for Phase 1
1. What type of income is Dr. Sterling hoping to replace?
Dr. Sterling is hoping to replace the income that he earns as a surgeon. In 2009, he reported $630,000 income from his medical practice. He is stating that he can no longer work in his chosen occupation, as a surgeon, because of debilitating depression.
2. In general, do you notice anything unusual about the Personal Statement? Consider that Dr. Sterling is 59 years old and his children are adults. He is a surgeon, and surgeons usually work a lot, and are usually high-income professionals.
The Personal Statement reveals several unusual accounts, amounts and patterns. The net worth of $2,140,000 may be high for an average family, but, for a high-earning family, this net worth seems somewhat low.
Several asset amounts appear low. The Cash balance of $10,000 seems low. The House, listed at $600,000, may not be as fancy as one would expect. The Pension of $210,000 seems too small for someone who has been a surgeon for many years. The Interest in Professional Corporation, by far the largest asset at $1,200,000, is most likely the investment that Dr. Sterling has in his clinic business. Initially, it is difficult to say if this asset is too small or too large.
On the liability side, all of the amounts seem unusually high or strange. The Automobile Loan of $25,000 is unusual, in that a high-earning professional should be able to pay cash for a car, or pay off a car loan quickly. The Home Mortgage of $400,000 is 2/3 of the home’s value of $600,000. One would think that Dr. Sterling could have paid off more of this debt. The Pension Loan of $15,000 is also troubling, in that a high-income person should not need to borrow against the pension.
The assets are smaller than expected and the liabilities are larger than expected. Therefore, net worth is smaller than expected. Dr. Sterling and his family have not increased their assets and decreased their liabilities as much as would be expected.
3. What accounts on the Personal Statement should you investigate? Why? Please be specific as to why these accounts are of concern.
It is possible to suggest that all the accounts could be investigated. Here is a list of the accounts with comments on each:
Cash, balance of $10,000: The balance seems low for a high-income family. The family should have more cash, on hand, or in the bank in checking and savings accounts, or in money market funds.
Vol. 3, Issue 2, Special Issue, 2011
Automobile, balance of $50,000: This balance seems reasonable, for one automobile. A surgeon would be expected to drive a nice car.
Personal Property, balance of $60,000: This balance seems low. This account probably includes furniture, fixtures, clothing and personal effects. This family should be able to afford expensive furniture and nice clothing.
Boat, balance of $100,000: This balance needs a careful look. The boat could be very nice. An appraisal may be suggested to establish the value.
Collectables, balance of $350,000: This balance needs more explanation. Collectables could be a variety of objects, for instance, artwork, jewelry, glassware or guns. This is an account that could be easily overstated or understated. An appraisal may be suggested to establish the value.
House, balance of $600,000: This balance seems low. A high-earning professional typically owns a more expensive and luxurious home than does Dr. Sterling.
Pension, balance of $210,000: This balance seems low. Dr. Sterling has worked as a surgeon for many years and should have more invested in his pension.
Interest in Professional Corporation, balance of $1,200,000: This balance needs a careful look. This account represents Dr. Sterling’s interest in his business. This is an account that could be easily overstated or understated. An appraisal may be necessary to establish the value.
Automobile Loan, balance of $25,000: This balance is too high. Dr. Sterling should be able to pay cash for a car, or pay off the car loan quickly.
Home Mortgage, balance of $400,000: This balance is too high. Someone making as much money as Dr. Sterling should be able to pay off more of the home mortgage. The mortgage represents 2/3 of the value of the home.
Pension Loan, balance of $15,000: This balance is too high. A person making as much money as does Dr. Sterling should not have to borrow against his pension.
Note to Instructors: Students will probably focus on just a few of the accounts. We recommend that instructors emphasize the general idea that assets seem somewhat low and liabilities seem somewhat high, resulting in a net worth that is lower than expected. Some points to start with could be the house, with its relatively low value and relatively high mortgage; the collectables, which are not described at all; and the auto loan and the pension loan, debt which should have been paid off easily. An important point is that there is a troubling pattern in the Personal Statement.
Vol. 3, Issue 2, Special Issue, 2011
(2) A commonly-used formula for expected net worth is:
Expected Net Worth =
(Age – 10 years) x Current Yearly Pretax Household Income 10
Stated Net Worth = $2,140,
Expected Net Worth = (59 – 10 ) x $630,000 = 49 x $630,000 = $30,870, 10 10 10 = $3,087,
The Stated Net Worth, $2,140,000, is less than the Expected Net Worth, $3,087,000. The difference is $947,000.
Dr. Sterling’s net worth is not as high as expected.
Please apply these guidelines to the Sterlings. Show your calculations. How do the Sterlings “measure up” here?
See above.
6. What concerns do you have about Dr. Sterling and his disability insurance claim?
I am concerned about Dr. Sterling and his disability insurance claim. His claim looks suspicious. At this time, I cannot say that his claim is fraudulent, as I do not have enough information to make that determination. However, I do see a troubling pattern. Dr. Sterling and his family have not accumulated the level of wealth that would be expected of a high-income family. As indicated in Questions 2, 3, 4, and 5, they have not built up their assets, say, with stocks and bonds, an expensive home, a second home, and a second car. They have not paid down their liabilities, and owe a sizable amount on the home mortgage, and smaller, but strange, amounts on their automobile and pension loans.
As an insurance investigator, I want to learn what Dr. Sterling is spending his money on. Apparently, he is not spending his money to build up his assets and pay down his debts. He claims that he is suffering from debilitating depression. This may be true. However, it is also possible that he is struggling with an addiction, and spending his money on gambling, drugs, or alcohol. Or, perhaps he wants a way out of his stressful, demanding career. Or, he might want a way to help pay for his retirement, since he has not saved much.
Assuming that I could continue my investigation, I want to figure out what Dr. Sterling is spending his money on. This will help me determine whether he is suffering from debilitating depression or trying to manage another problem.
Vol. 3, Issue 2, Special Issue, 2011
7. What additional sources of information (documents, interviews, etc.) should you request or search for?
Many sources of information would be useful in this case. Some of these sources of information are:
- disability insurance policy
- tax returns for the family
- tax returns for the business
- W-2 tax forms showing wages
- bank statements
- credit card statements
- legal documents related to professional corporation
- appraisal report for the Sterlings’ collectables
- appraisal report for the Sterlings’ house
- appraisal report for Dr. Sterling’s interest in professional corporation
- letter from physician treating Dr. Sterling for his depression
- interview with Dr. Sterling
- interview with Mrs. Sterling
- interviews with the children, Lauren and A. J.
- interviews with employees of the clinics
Case
Phase 2
Assume you have found, requested and received some additional information and documents after starting your investigation. These documents provide more information about Dr. Sterling. Please find these documents attached, as follows.
Exhibit 1: Disability Insurance Policy Exhibit 2: Credit Card Statement Exhibit 3: W-2 (Selected Information) Exhibit 4: Memo of Interview with Dolores Jones, Office Manager of the Clinic Exhibit 5: Appraisal Report for the Sterlings’ Home Exhibit 6: Statement of Activities for Dr. Sterling’s Clinics
Vol. 3, Issue 2, Special Issue, 2011
Exhibit 2: Credit Card Statement
Finance One Bank
Credit Card Statement for January 3 to February 2, 2010
Account # 1714 9600 4444
Albert Sterling, MD VIP Platinum Since 2002
Beginning Balance $45,100. -Payments -$27,800. +Purchases $31,300. +Finance Charge $1,200. =Ending Balance $49,800.
Minimum Balance $3,500.
Due Date 28-Feb-
Detail for January 3 to February 2, 2010
Payments
Payment--Thank you $27,800.
Transactions
10-Jan-10 Java Joe Coffee Shop Chicago $ 14. 14-Jan-10 Boca Chica Restaurant Chicago 590. 15-Jan-10 Brooks Brothers Evanston 3,699. 18-Jan-10 Delta Airlines CHICA VEGAS FLTS 3489, 2378 FST CLS RT 2,100. 20-Jan-10 Access Check #17 Cash 12,000. 25-Jan-10 Mirage Hotel Las Vegas Deluxe Suite Jan 18-25 8,397. 29-Jan-10 Continental Airlines RES— Flts 345, 458 First Class Rd Tr Atlantic City 4,500.
Vol. 3, Issue 2, Special Issue, 2011
Exhibit 3: W-2 (selected information)
Wages and Salaries $630, Federal Tax Withholding $189, State Tax Withholding $63,
Exhibit 4: Memo of Interview with Dolores Jones, Office Manager of Clinic
Memo for File
Date: February 16, 2010
I interviewed Dolores Jones, Office Manager of Dr. Sterling’s downtown Chicago clinic. We met on Monday, February 15, 2010, from 10:00 to 11:15 am in a coffee shop, Java Joe’s, near the clinic. Here are some relevant excerpts of our conversation:
Ms. Jones has been the office manager for 10 years. Before that, she had been home with her three children. She works about 45 hours a week, 5 days a week. She lives in Evanston. She supervises the receptionists and medical records specialists. She also is in charge of billing the patients and their insurance providers. She reports that much of her time is spent filing the necessary paperwork with insurance companies (for patients covered by their employers or other private insurance plans) or with various government agencies (for patients covered by medical assistance plans or Medicare).
She reports that she likes her job and plans to stay indefinitely. She says she gets along fine with Dr. Sterling, and that he is a fair boss. When I asked her if she has any concerns about Dr. Sterling, she said that he has been somewhat moody lately, and seems a bit “down.” When I asked her for more specifics, she said that he has snapped at the office staff and even a few patients recently. This is out of character, she explained, but she figures that he is just tired. She did not have any other comments relative to this.
Ms. Jones does not know Dr. Sterling’s family personally very well. She has seen Mrs. Sterling and A. J. at the clinic a few times. Lauren, the Sterlings’ daughter, is the office manager at Dr. Sterling’s clinic in Lake Forest. As such, Ms. Jones and Lauren do talk on the phone and correspond by e-mail about various scheduling and patient matters, but apparently do not interact on a personal level. Ms. Jones could not say if there seemed to be issues in the family, as she does not know the family in that way.
Journal of Forensic & Investigative Accounting
Vol. 3, Issue 2, Special Issue, 2011
Exhibit 6: Statement of Activities for Dr. Sterling’s Clinics
Upon request, Dr. Sterling provided his clinics’ Statement of Activities for the last five years. A local accounting firm, Phipps LLP,has performed annual audits and issued unqualified opinions. The following is a copy of the Statement of Activities.
Statement of Activities^2009
2008
2007
2006
2005
Revenue, gains and other support: Net medical service revenue
$^
2,100,
$^
2,050,
$ 2,500,
$^
2,220,
$ 2,150,
Investment returns allocated to current activities
(50,000)
(120,000)
100,
50,
48,
Contributions available for current activities
15,
20,
40,
38,
35,
Other
81,
80,
110,
105,
95,
Total revenue, gains and other support
$^
2,146,
$^
2,030,
$ 2,750,
$^
2,413,
$ 2,328,
Expenses: Salaries and benefits
1,300,
1,290,
1,260,
1,180,
1,150,
Supplies and facilities
470,
450,
510,
480,
450,
Provision for uncollectible accounts
45,
41,
55,
48,
46,
Finance and investment expenses
12,
12,
18,
16,
15,
Total expenses
$^
1,827,
$^
1,793,
$ 1,843,
$^
1,724,
$ 1,662,
Income from current activities
$^
319,
$^
237,
$^
907,
$^
689,
$^
666,
Non-current and other items: Contributions not available for current activities,net
$^
10,
$^
10,
$^
25,
$^
20,
$^
18,
Unallocated investment returns, net
(125,000)
(300,000)
250,
125,
120,
Pension and postretirement expenses
(24,000)
(22,000)
(30,000)
(28,000)
(26,500)
Total noncurrent and other items
$^
(139,000)
$^
(312,000)
$^
245,
$^
117,
$^
111,
Increase in net assets
$^
180,
$^
(75,000)
$ 1,152,
$^
806,
$^
777,
Vol. 3, Issue 2, Special Issue, 2011
Questions for Phase 2
1. How does this additional information affect your judgment about the validity of the claim? Why? 2. What should you do now?
Suggested Solution for Phase 2
1. How does this additional information affect your judgment about the validity of the claim? Why?
The additional information adds to my concern about the validity of the disability income claim. The Exhibits are addressed in order:
Exhibit 1: The disability income policy shows that Dr. Sterling would receive $30,000 per month, or $360,000 per year, if he were considered to be disabled. This annual support of $360,000 would be less than his most recent earnings of $630,000. However, he would still be able to finance a very nice lifestyle or fund other activities.
Exhibit 2: The credit card statement for January 2010 shows some large amounts. The beginning balance is $45,100 and the ending balance is $49,800. The payment is $27,800, the purchases are $31,300, and the finance charge is $1,200. There is a large purchase, $3,699, at Brooks Brothers, probably clothing. The expenditures related to Las Vegas are more interesting — the first-class round trip airline tickets for $2,100 and the hotel suite for $8,397. There are also first-class round trip airline tickets to Atlantic City for $4,500. Both Las Vegas and Atlantic City are prime gambling spots. The item of most concern is the $12,000 access check. This is a large amount of cash borrowed from the credit card company, Finance One Bank.
The information on this credit card statement suggests that Dr. Sterling likes to gamble. Also, the credit card balance is not shown as a liability on the Personal Statement. I would like to know why this balance was not included.
Exhibit 3: The amount for wages and salaries, $630,000, in 2009, matches the amount provided by Dr. Sterling. The federal income tax withholding, $189,000, is 30% of the wages, and the state tax withholding, $63,000, is 10%. The GPIC file reports that the combined federal and state income tax rates are approximately 40%. The W-2 is consistent with the related information in the file.
Exhibit 4: The interview with Dolores Jones, office manager of the downtown Chicago clinic, gives insights into Dr. Sterling’s behavior. She reports that he has been “somewhat moody lately,” and that he snapped at the office staff and some patients. She thinks he is tired. She does not know his family well enough to say if there are issues at home.
