When the Missouri State Board of Embalmers and Funeral Directors meets this week, their staff will be seeking input regarding the scope of the second round of preneed audits.  Each preneed seller is to be audited at least once every five years, and the first round of audits was ‘concluded’ this year.   Included on the meeting agenda is the staff’s proposed scope of the financial examinations.  The staff had previously acknowledged that the first audit would focus on each seller’s contracts and recordkeeping.   Now that each seller’s contracts and records have been review, where should the next audit focus?

Obviously, some sellers had/have recordkeeping problems, and the next audit will need to determine if progress has been made to correct their problems.  But, we would question whether 100% of all contracts need to be reviewed if a seller’s first examination found the recordkeeping and contract forms to be in compliance.   A sampling review of the ‘new’ contracts would suffice for sellers with compliant recordkeeping.  But even for a seller with deficient recordkeeping, the examination may need to focus more on the method for booking contracts, payments and distributions.

Similarly, the examination process could use a sampling approach with regard to consumer contacts.   A seller’s first examination included a letter to each consumer that was not shown as having a paid in full arrangement.  Instead, a sampling of consumer letters could be sent.  However, that sampling should also incorporate current contract data.  The use of stale contract data by the Board’s examiners led to consumer confusion, and seller frustration.

But, the more important shift in the examination scope could be the inclusion of procedures to test the seller’s death claims.  One criticism made of the examination process by Missouri funeral directors was that it would be impossible for auditors to find the ‘hidden drawer’.   In other words, it is very difficult to find the funeral director that hides his unfunded contracts.  There is truth to that statement.  But a review of the seller’s statements of goods and services can lead an examiner to irregularities that could be a flag for fraud.  (Why did you provide these funerals without seeking payment from the family?)