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Broadly speaking, cognitive decline (whether dementia or mild cognitive impairment) presents three financial risks:<\/p>\n
The risk of expensive care is obviously important, but that\u2019s not what I want to focus on today. (There are many<\/em> articles discussing the pros and cons of long-term care insurance, budgeting to pay for care out of pocket, and so on.) Today I want to focus on those first two risks: fraud and mismanagement.<\/p>\n And as far as things we can do<\/em> to minimize those risks, two of the most important categories of action steps are:<\/p>\n But I\u2019m not a health care professional or an attorney, so those aren\u2019t what I\u2019ll be covering here either.<\/p>\n What follows is a CPA\u2019s perspective<\/em> on minimizing the financial risk of fraud or mismanagement due to cognitive decline.<\/p>\n Many people think of CPAs as \u201ctax people.\u201d And taxation is<\/em> a major area of practice for CPAs. But another major area of CPA practice is audit, which can include developing or testing internal controls and oversight within an organization. (I promise this is relevant to personal financial planning and cognitive decline, so please stick with me.)<\/p>\n In case you haven\u2019t encountered the term before, internal controls<\/strong> are policies implemented by an organization to try to provide assurance as to the effectiveness of the organization\u2019s operations and compliance with the applicable laws and regulations.<\/p>\n For example, imagine a small business that has insufficient<\/em> internal controls. The firm has one accountant, and that person has sole responsibility for paying bills and doing all of the bookkeeping. In such a scenario, the accountant could create his own external LLC, set it up within the firm\u2019s accounting software as a vendor, send fake invoices from<\/em> the LLC to<\/em> his employer\u2019s business, pay<\/em> those invoices using the employer\u2019s credit card or checking account, and record the expenses as if they were legitimate business costs. The accountant might be able to steal money from the employer every month, for years, with nobody noticing.<\/p>\n A common internal control that would prevent something like this is separation of duties<\/strong>. The business could set things up so that one employee has the ability to disburse funds (i.e., pay invoices) and a separate employee does the bookkeeping. In this way, if either of the two employees tried to perpetrate a fraud such as the one above, the other employee would likely catch it. Each person provides some oversight over the other.<\/p>\n Internal controls can be broadly grouped into two categories:<\/p>\n As we age, and the risk of cognitive decline increases, implementing various forms of internal controls within our own households<\/em> can reduce the risk that we\u2019ll be the victims of fraud or our own financial mismanagement.<\/p>\n I would encourage you to have controls in at least three categories:<\/p>\n I\u2019ll provide some suggestions of such controls below. Some are preventive controls, and others are detective controls. And if you spend some time thinking creatively about it, I\u2019m sure you could come up with a whole list of additional options. Most internal controls do come with a cost though, whether it\u2019s time to implement them or a financial cost if you\u2019re hiring a professional to help with the implementation. So you\u2019ll need to make your own assessment to determine where your biggest risks are, which controls would be most effective, and which controls would have the best cost\/benefit ratio.<\/p>\n A common practice is to go through the credit card statement(s) every month and look at every charge, confirming that it is money that you spent on purpose (i.e., it\u2019s not a fraudulent charge, it\u2019s not a subscription that you thought<\/em> you canceled a year ago, etc.). That\u2019s a great internal control. And I\u2019d encourage you to do the same thing with the checking account(s).<\/p>\n At some point though, in order for this to be an effective control in the context of potential cognitive decline, this needs to become a multiple-person job, so that there is meaningful oversight. If you have a significant other, you both<\/em> go through and look at every charge on the credit card. If you are single, I would encourage you to enlist a trusted family member or professional. And more specifically, for this to function as an effective internal control, we want two people who we believe are of sound mind<\/em> to be able to explain any spending transaction. That means that, if at some point it becomes clear for a couple that only one person is of sound mind, then we need to enlist a third person. And for a single person, if that person is no longer of sound mind, then ideally we want two<\/em> other people.<\/p>\n Example:<\/strong> for one reader of this blog, the clear \u201cwe have a problem\u201d moment came from just such an exercise. She and her husband had agreed they would make a sizeable donation to one of their favorite charities. Later, when reviewing their credit card statement for the month, the donation was there as expected. But there was also an identical transaction a few days later. Apparently the husband had put the donation on his to-do list. He made the donation. And then he completely forgot that he had done it. So he did it again a few days later.<\/p>\n If you haven\u2019t done it before, this may sound like a super labor-intensive job. In my experience, it\u2019s not so bad. For our household, it\u2019s usually less than 10 minutes per month.<\/p>\n If you\u2019re super concerned though about it being too laborious, you could implement a dollar threshold: for example, checking all the transactions that are over $X.<\/p>\n A missing<\/em> expense can also be important information (e.g., an annual insurance premium not being paid), though it\u2019s much harder to notice. For this, a basic version of what accountants call \u201cvariance analysis\u201d may be helpful. Essentially, if you compare the month in question to the previous month as well as to the same month from the previous year, are any big expenses missing? (For example, if you\u2019re looking at February 2025, you\u2019d compare to January 2025 as well as February 2024.)<\/p>\n Two last spending-related controls, both of which are easy to implement:<\/p>\n Similar to the above two-person-review policy with spending, I\u2019d encourage you at some point to implement the same periodic review policy for investment accounts. If any changes were made by anybody, why? Two parties, both of sound mind, should each be able to answer that question.<\/p>\n With respect to such a review policy, having a written investment policy statement (IPS)<\/a> is helpful, as it gives you (and whoever else is involved) a clear metric against which actions can be judged. (\u201cWe have<\/em> a plan. Was this action in keeping with the plan?\u201d)<\/p>\n Simplification is also quite beneficial here. (And it\u2019s a rare internal control that may have no cost at all!) The fewer the number of accounts, and the fewer the number of holdings within each account, the easier it is for you (and whoever else is on our multiple-person \u201cinvestment oversight committee\u201d) to keep tabs on everything.<\/p>\n The IRS requires tax professionals to have a Written Information Security Plan (WISP), given that we are in possession of many people\u2019s personal information. While you are probably not subject to any similar regulatory requirement, the principles are similar. Per IRS Publication 5708<\/a>, a good information security plan should focus on three areas:<\/p>\n Note that none of the above are specific to concerns about cognitive decline. They\u2019re good policies regardless of circumstances. (Publication 5708 linked above also provides a sample information security plan if you want to take a look, though it would require some adaptation for a household context.)<\/p>\n Any internal control policies should be written \u2014 ideally in a way that is explicit and concise, with a minimum of jargon. And these written policies need to be shared with anybody who is going to be involved with their implementation.<\/p>\n Controls also need to be reviewed and reassessed on a regular basis. Sometimes a well-intentioned control will turn out to have gaps that don\u2019t become clear until it\u2019s put into action. Sometimes controls need to be updated due to changes in technology. And we also need to check periodically that controls are actually being being implemented as designed. (If you have a policy<\/em> to check over your spending every month with somebody, but you don\u2019t actually do<\/em> that, well then the policy isn\u2019t doing much good.)<\/p>\n With respect to the entire area of cognitive decline, whenever a clear mistake or a dubious decision is made, we not only want to try to correct it if possible, we also want to keep records<\/em> of it. If it becomes clear that questionable decisions are occurring more and more often, we want to see that pattern as early as possible, so we can take action as needed. As much as it doesn\u2019t sound fun to keep records regarding our own potential mental decline, it\u2019s better to know than to not know.<\/p>\n Relatedly, it\u2019s likely a good idea to make sure that any financial professionals with whom you work (e.g., tax professional, financial planner, attorney) know of somebody (or ideally even a few people) to whom they can report when something seems \u201coff\u201d \u2014 and give them the authority to do that.<\/p>\n It\u2019s easy to say, \u201cwell I\u2019m obviously fine now, so I\u2019ll worry about this later.\u201d But we want to create these policies and put them into action at a time when you know that you are<\/strong><\/em> of sound mind. That\u2019s the whole point. We don\u2019t want somebody of questionable mental capacity to be charged with the jobs of creating and implementing important policies. If you\u2019re of an age where potential cognitive decline is even on your radar at all, I think it\u2019s a good idea to get started.<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":" Broadly speaking, cognitive decline (whether dementia or mild cognitive impairment) presents three financial risks: The increased risk that you\u2019ll fall victim to fraud. The increased risk that you\u2019ll make poor decisions that will be costly. (Not the result of fraud, just something along the lines of investment or spending decisions that make no sense.) Let\u2019s […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[96],"tags":[13402,15589,17971,10912,13177,22156,14955,12666,11115],"dealstore":[],"offerexpiration":[],"class_list":["post-51049","post","type-post","status-publish","format-standard","hentry","category-investing","tag-cognitive","tag-cpas","tag-decline","tag-financial","tag-investor","tag-minimizing","tag-oblivious","tag-perspective","tag-risk"],"yoast_head":"\n\n
Internal Controls\/Oversight<\/h3>\n
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Application to Households<\/h3>\n
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Spending-Related Controls<\/h3>\n
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Investment-Related Controls<\/h3>\n
Information-Related Controls<\/h3>\n
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Maximizing Policy Effectiveness<\/h3>\n
Sooner Rather Than Later<\/h3>\n