Fraud Detection: Better methods are needed for purchasers of alarm accounts

Friday, March 1, 2002

How does an alarm company verify that the accounts it is purchasing were properly designed and installed? Traditionally purchasers have been relying on the seller's representations in the asset and purchase agreement of the transaction, financial records of the reported monthly recurring revenue (MRR) and sometimes a visit is performed to a small sampling of the seller's accounts.

Unfortunately, this may not be enough. To attempt to focus on the potential for fraud, new techniques need to be employed by buyers of alarm accounts because in some case sellers representations are not factually accurate and the results to the buyer can be disastrous.

For example, are all commercial fire alarm accounts sending in a daily test signal to the central station and are these signals supervised? What type of control communicator is being utilized for the installation and is it UL listed for household use only in a commercial application? Do central station records evidence excessive false alarms, undefined zone literal information, unmonitored zones or is the digital communicator transmitting in data that does not accurately reflect the configuration of the system? Do subscribers' files contain complete and detailed programming and dealer lockout code information and have all service records been maintained within the file or have documents been removed by the seller to sanitize problem accounts?

In order to attempt to focus on unscrupulous sellers of alarm accounts or sophisticated attempts to defraud buyers, the industry must create a codification of better techniques and methods to detect this deception before signing on the dotted line. What is worse than paying a high multiple for alarm accounts is paying for accounts that were not properly designed and installed. That ultimately creates an inherent liability for the purchaser, not only in the potential for an undetected burglary or fire condition, but in additional revenue and resources that the purchaser must direct to system service requirements, which may have to be provided to the purchased account at no charge by the buyer, either due to contract requirements or in order to keep the customer satisfied and the account performing.

A current monitored account on the aging report does not scratch the surface for an account that unbeknownst to the subscriber is defective and dangerous. The industry is well aware that many subscribers are not following the heed to test their system regularly and some of the accounts that are being purchased have never sent in a single signal to the central station from inception.

Clearly, if the system has never sent in digital signals than how can the seller define or crystallize that proper testing of the system has occurred? Further to this examination of the account is verification that the digital dialer is even able to transmit to the digital receiver at the central station. All too often, older accounts in the seller's base which were originally programmed to dial a local number may have been affected by telephone company area code prefix requirements that silently render the digital communicator non-functional. Therefore, on this group of accounts, service records should be reviewed to verify that proper reprogramming and testing has occurred.

Techniques that are utilized by the purchaser should vary from transaction to transaction and be cross referenced with other core key indicators which help substantiate whether the accounts are quality or a problem.

At the end of the day, sellers have a duty to accurately represent the type of accounts that they are selling and purchasers must take proactive measures to only purchase accounts that meet their standards. This, in the end, can increase or decrease overall acquisition profitability.

Jeffrey D. Zwirn, CPP, CFE, DABFET, is the president of IDS Research and Development, Inc. in Teaneck, New Jersey and has over 25 years of experience in the alarm industry. IDS provides nationwide expert witness and consultation services to the alarm industry and other entities in addition to due diligence for buyers and sellers of alarm accounts. Zwirn can be reached at 800-353-0733 or at