Workers’ Compensation Fraud: Red Flags, Reporting, and Prevention

Workers' compensation fraud is a knowing, intentional attempt to deceive the workers' comp system for financial gain, whether that means faking an injury, hiding payroll, or billing for care that never happened. The hard part for employers isn't deciding whether fraud occurred—that's not your call to make. The difficulty comes in recognizing when something is worth documenting and passing along without jumping to conclusions that an honest mistake, a disputed claim, or a suspicious fact alone doesn’t support

That distinction matters more than most red-flag checklists admit. A late-reported injury, a claim with no witnesses, or an employee with a prior injury on record does not prove deception. Treat it as proof, and you risk a retaliation claim, a privacy violation, or a damaged relationship with an honest worker.

This guide explains what workers' compensation fraud actually is, who can commit it, how common it really is, which red flags are worth documenting, and how to report a concern through the right channel without making costly mistakes.

What Is Workers' Compensation Fraud?

Workers' compensation fraud is the knowing, intentional deception, concealment, or misrepresentation of facts to gain a benefit, avoid a cost, or otherwise cheat the workers' compensation system. The exact legal definition varies by state, but nearly every version shares one core element: intent. A person has to knowingly do something false, not simply make a mistake.

That word "knowingly" is what separates fraud from everything that merely looks like it.

An administrative mistake is not fraud. Neither is incomplete information on a form, a claim your carrier disputes, or a claim that gets denied for a coverage reason. A denied claim means the injury may not be compensable. It does not mean anyone lied.

Here is the distinction in plain terms:

• A mistake is a wrong fact with no intent to deceive, like an employee misremembering a date.
• A disputed claim is a disagreement about whether an injury is work-related or how much it's worth.
• A denied claim is a decision that the claim doesn't meet coverage rules.
• A suspicious circumstance is a fact that raises a question but proves nothing by itself.
• Fraud is intentional deception, confirmed by the party with authority to review it.

Even when something isn't fraud, inaccurate information may still need to be corrected. If a payroll figure or job classification is wrong, you fix it because accuracy matters, not because someone committed a crime. Correcting an error is routine business. Alleging fraud is a serious accusation.

This is why employers should avoid labeling anything "fraud" before the right party reviews the facts. Your carrier, claims administrator, a state fraud bureau, or law enforcement makes that determination. Calling it fraud out loud, in an email or to the employee, can expose you to defamation or retaliation risk if you're wrong.

Definitions, reporting requirements, investigation authority, and penalties also vary widely by state. What counts as a chargeable offense in one state may be handled administratively in another, and the dollar thresholds that turn fraud into a felony differ across the country.

Federal workers' compensation programs are a separate world entirely. Claims under programs like the Federal Employees' Compensation Act follow their own rules and use their own reporting pathways through the U.S. Department of Labor, not state agencies. If you employ workers covered by a federal program, the state process below won't apply.

With the definition set, the next question is who can actually commit it.

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Who Can Commit Workers' Compensation Fraud?

Workers' compensation fraud can be committed by claimants, employers, medical providers, and organized participants such as recruiters or attorneys. It is not only an employee problem, and framing it that way misses where a large share of the dollar losses actually occur.

Understanding the categories will help you recognize a concern for what it is, rather than assuming every red flag points to an injured worker.

Employee (Claimant) Workers' Compensation Fraud

Claimant fraud happens when an employee knowingly deceives the system to obtain benefits they aren't entitled to. Common forms include fabricating an injury that never happened, exaggerating symptoms, claiming a non-work injury as work-related, malingering, or working while collecting indemnity benefits without telling the handling entity.

The keyword, again, is “knowingly.”

An employee who returns from an injury and struggles with certain tasks is not committing fraud. An employee who reports pain that doctors can't fully explain is not committing fraud. Fraud requires an intentional false statement, not an inconsistency that might have an innocent explanation.

Consider this difference. An employee who says they can't lift anything, then gets filmed moving furniture all weekend, has a real inconsistency worth documenting. An employee whose story about how they fell shifts slightly between the incident report and a later interview may simply be recalling a stressful event imperfectly. One deserves review. Neither proves fraud until the right authority says so.

Employer (Premium) Workers' Compensation Fraud

Employer fraud, often called premium fraud, happens when a business intentionally deceives its carrier to lower its workers' comp costs. This can include deliberately understating payroll, misclassifying employees, hiding workers off the books, or misrepresenting operations to obtain a lower rate.

Premium fraud is a significant piece of the overall problem, not a footnote.

Most classification and payroll issues, though, are ordinary corrections rather than fraud. Job codes get applied incorrectly. Payroll gets miscounted. A worker's duties change, and the classification lags behind. These are the kinds of errors an audit exists to catch and fix. Fraud requires intent, meaning the employer knew the information was false and used it anyway to cut premiums.

Most workers' compensation policies also include a duty-to-cooperate condition, meaning the employer is contractually obligated to assist the carrier's SIU with its investigation once a claim is referred, not just free to hand it off and step away.

Medical Provider Workers' Compensation Fraud

Provider fraud involves doctors, clinics, billing companies, or other medical professionals who deceive the system for financial gain. Common schemes include unnecessary treatment, upcoding to more expensive procedures, phantom billing for services never provided, excessive or unnecessary durable medical equipment (DME), and unnecessary surgeries.

Provider fraud is often the hardest to detect and among the most expensive.

It usually surfaces through billing patterns and treatment records that a carrier or claims administrator reviews, not through anything an employer directly observes. As an employer, your role here is limited. You may notice something odd in the paperwork you receive, but investigating a provider is not your job, and improperly digging into medical records can create serious privacy problems.

Agent, Broker, or Application Fraud

Agent or broker fraud happens when the person or agency responsible for placing or servicing a policy deceives the employer, the carrier, or both for financial gain. Common schemes include selling "ghost policies" that were never actually bound with a carrier, submitting false information on an application, diverting premium payments instead of remitting them to the carrier, and manipulating classifications to quote a lower premium than the operation actually qualifies for.

This category is different from the others in one important way: the employer is typically the victim, not a suspect.

An employer may believe coverage is in place, pay premiums in good faith, and only discover after a claim is filed that no policy actually exists. In that situation, the concern isn't fraud within the employer's own workforce; it's whether the employer was deceived about its coverage. The practical takeaway is to verify that your policy is active directly with the carrier, rather than relying only on a binder, ID card, or an agent's confirmation. It's also worth checking periodically, not just at renewal.

Organized or Collusive Fraud

Collusive fraud happens when multiple parties (typically a claimant, a medical provider or clinic, and sometimes an attorney) coordinate to manufacture or inflate claims for shared financial gain. This is distinct from a single dishonest individual acting alone: the scheme depends on cooperation across parties who each benefit from the same false claim.

For most employers, this category stays in the background. You're unlikely to uncover an organized ring on your own, but it's worth knowing these cases exist so you understand why carriers and fraud bureaus investigate patterns that stretch across multiple claims, providers, or referral sources rather than looking at any single claim in isolation.

The table below summarizes the categories side by side.

Knowing who can commit fraud is useful, but it raises an obvious follow-up: how often does any of this actually happen?

Is Workers' Compensation Fraud Common?

Workers' compensation fraud is real, but it is genuinely hard to measure, and most claims are legitimate. The difficulty is that different sources count completely different things: confirmed convictions, suspected cases, referrals to investigators, avoided premiums, or estimates of fraud that were never detected at all.

Because of that, the "how common is it" question has no single honest answer.

The National Council on Compensation Insurance (NCCI), which manages the nation's largest workers' compensation database, has historically used a narrow definition and estimated that a low single-digit percentage of claims are fraudulent. Other industry sources put the figure higher, and surveys of employer perception land higher still, often in the 10 to 20 percent range. According to a widely cited industry summary, that gap exists largely because NCCI applies a much narrower definition of fraud than the sources reporting bigger numbers.

That single fact explains most of the confusion. A number is only as meaningful as its definition.

At the low end, a PBS Frontline investigation into workers' comp fraud reported that studies show only 1 to 2 percent of claims are fraudulent. At the high end, some prosecutors' offices cite far larger figures. A California district attorney's office, for instance, states that up to 30 percent of the state's claims are estimated to be fraudulent. Those two numbers are more than an order of magnitude apart, which shows how much definition and methodology drive the result rather than reality itself.

Here's the trap employers fall into. It's easy to fixate on the scariest figure, or to hear a coworker say, "half these claims are fake," and conclude that fraud is everywhere. The most rigorous, narrowly defined studies don't support that. The overwhelming majority of workers' compensation claims involve real injuries and legitimate benefits. Treating claimants as suspects by default is both wrong and legally risky. Three rules keep these numbers in perspective:

• Confirmed fraud and suspected fraud are different things. A referral or a "red flag" is not a conviction, and denied claims and honest errors get swept into loose estimates.
• Percentages can't be compared without their details. You need the definition, the denominator, the geography, and the data year before two figures mean anything side by side.
• Most figures measure only one slice. A stat about claimant fraud says nothing about premium or provider fraud, and vice versa.

So fraud exists and deserves attention, but it is not the norm. That reality should shape how you respond to a suspicious claim: carefully, not aggressively. The cost question follows the same logic.

How Much Does Workers' Comp Fraud Cost an Employer?

Workers' compensation fraud can raise costs through higher premiums, inflated claim payouts, investigation expenses, administrative time, and broader damage to the insurance system that everyone ultimately pays for. But like prevalence figures, cost estimates vary enormously depending on what's being measured.

No single dollar figure describes "the cost of workers' comp fraud," and anyone who gives you one without qualifying it is oversimplifying.

To see how wide the range is, consider a few dated, sourced estimates that measure different things:

• Industry estimates have put total workers' compensation insurance fraud at roughly $34 billion a year, much of it concentrated in claims fraud. Where estimates break the number down by party, they consistently attribute the larger share to employers: a California Department of Insurance infographic cites about $23 billion in employer premium fraud versus roughly $9 billion in worker claims fraud each year. The dollar loss sits mostly on the premium side, not on injured workers.
• A 2018 California legislative background report estimated that fraud cost that one state's system between $1 billion and $3 billion per year, and noted how much organized activity avoids detection entirely.
• At the enforcement level, the New York State Inspector General reported identifying about $2.7 million in workers' compensation fraud in 2024, resulting in 14 arrests, a figure that measures confirmed enforcement outcomes, not total losses.

Look at how different those three numbers are, and why.

The $34 billion figure is a national estimate covering all types of fraud. The California range is one state's system cost. The New York number is confirmed enforcement activity for a single year. These figures measure different things entirely, so stacking them against each other tells you nothing.

The practical takeaway for your business: fraud can raise your costs, but the most reliable way to think about your own exposure isn't a national headline number. It's your own claim experience, your classification accuracy, and how well your claims are documented and managed. Which brings us to the signs actually worth watching.

What Are the Red Flags of Workers' Compensation Fraud?

A red flag is a fact, inconsistency, or pattern that may be worth documenting or referring for review. It's a reason to document and ask questions; fraud is confirmed only by the party with authority to review it. This is the single most important idea in this entire guide, and it's the one most red-flag checklists get wrong.

The point of recognizing red flags is to know what to consider objectively, not to build a case in your head.

Every category below comes with the same rule: observe, document the facts, and pass concerns to the right party. Don't draw conclusions about intent, and don't act on the employee's employment because of a suspicion.

Claim and Incident Red Flags

These involve the story of the injury itself. Examples include conflicting accounts of how the injury happened, details that change between the incident report and later statements, timing that doesn't add up, or facts that don't match your own records.

Document what was said and when, and note the source.

But be careful with the classics. A delayed report, no witnesses, a prior claim on file, or an unusual description of how an accident happened are common features of legitimate injuries, too. People report late out of fear or toughness. Plenty of real injuries have no witnesses. None of these proves anything alone.

Work Activity and Return-to-Work Red Flags

These involve a gap between reported restrictions and observed activity, such as an employee on restricted duty seen doing heavier physical work, or evidence of outside employment that conflicts with claimed limitations.

Write down the specific, objective observation, including what you saw and when.

What you should not do is play doctor. You can't diagnose someone from a parking-lot glimpse, and you can't assume intent from a single moment. Someone lifting a light bag isn't necessarily violating a restriction against repetitive heavy lifting. Note the objective fact and let professionals interpret it.

Payroll, Classification, and Employment Record Red Flags

These connect to both claimant and premium fraud. Examples include payroll records that don't match reported hours, job classifications that don't reflect actual duties, timekeeping gaps, or employee-status information that conflicts across systems.

Accurate records are your best friend here, because inconsistency in your own data is exactly what makes a legitimate claim look questionable and a questionable claim hard to sort out.

Often, these "red flags" simply reveal that your own recordkeeping needs tightening, which is a prevention issue, not a fraud case.

Medical, Billing, or Treatment Red Flags

These appear in the paperwork: unusual billing patterns, repeated or excessive services, treatment records that don't match the reported injury, or questionable referrals.

Note what's inconsistent in the documents you legitimately receive.

Do not go hunting through protected medical information to build a theory. Improperly accessing medical records can violate privacy laws and turn your fraud concern into a legal problem. Billing and treatment patterns are for your carrier or claims administrator to evaluate.

Documentation and Communication Red Flags

These involve the paper trail: statements that contradict each other, missing information, records that appear altered, or communications that conflict with the incident, payroll, or claim file.

Focus on objective observations and always note where the information came from.

The theme across all five categories is discipline. A red flag tells you to document and ask, not to accuse. The table below turns that discipline into a quick reference.

Once you've documented objective facts, the next question is what to actually do with them.

How Do Employers Report Suspected Workers' Compensation Fraud?

Employers report suspected workers' compensation fraud through formal channels that depend on the state, the type of fraud, and the claim arrangement. There is no single national hotline, but there is a reliable way to find the right one.

Start with the people already connected to your claim, then work outward to state and federal authorities.

Rather than memorizing a 50-state directory, use this order to identify the correct channel:

• Check your carrier or claims administrator's instructions first. Most insurers have a special investigations unit (SIU) and a defined process for referring suspected fraud, and they're already handling the claim.
• Contact your state workers' compensation agency. Many run or coordinate with fraud investigation units.
• Contact your state department of insurance or fraud bureau. Most states operate an insurance fraud bureau that takes referrals; the National Association of Insurance Commissioners (NAIC) runs an Online Fraud Reporting System that routes reports to the appropriate state department.
• Use the pathway your PEO, carrier, or claims administrator provides. If you work with a PEO or third-party administrator, they can point you to the correct authority and help assemble the referral.
• Confirm whether the claim is state or federal. Federal program claims don't go to state agencies at all.

For federal workers' compensation programs, suspected fraud is reported to the U.S. Department of Labor Office of Inspector General, which operates a hotline for fraud involving DOL programs, including the Office of Workers' Compensation Programs. The NICB also operates a fraud hotline at 1-800-835-6422 for insurance crimes across coverage types.

Because the routing varies so much, this is one of the clearest places a PEO or carrier earns its keep. Rather than guessing, you hand the facts to someone who already knows the correct authority.

What Information Should Be Included in a Workers' Comp Fraud Report?

A workers' compensation fraud report should focus on facts and the source of your concern, not on speculation or a conclusion about guilt. Reporting channels want objective, verifiable information they can investigate, not an accusation.

The goal is to describe what you observed and where it came from, then let investigators do their job.

Reports commonly ask for:

• Employee or claimant identifying information
• Employer information
• The claim number, if available
• Date of injury or claim
• A factual description of the concern
• Relevant dates, statements, and observations
• Witness names or contact information
• Supporting records or documents
• Any prior reports made to your PEO, carrier, claims administrator, or another agency
• Whether you're reporting anonymously or confidentially, if the channel allows

Anonymous and confidential reporting options vary by state and by channel. Some fraud bureaus let you remain anonymous, but appreciate a contact number for follow-up questions. Check the specific channel's rules before you assume your report will stay private.

What Should Employers Not Do When Reporting Workers' Compensation Fraud?

The mistakes employers make while reporting fraud often cause more damage than the fraud itself. Most create claim-handling, retaliation, privacy, or evidence problems that can expose your business to liability, even when your underlying suspicion was reasonable.

Keep this list close, because these are the actions that turn a fraud concern into a legal one.

• Don't confront or publicly accuse the employee, provider, or anyone else before the appropriate party reviews the facts.
• Don't conduct unauthorized surveillance. Leave any surveillance decision to your carrier's SIU or investigators operating within the law.
• Don't access private or protected medical information improperly to build your own case.
• Don't alter evidence, recreate records, coach witnesses, or spread unverified information.
• Don't delay or halt the normal injury-reporting and claims process because you're suspicious. The claim still moves forward.
• Don't change the employee's duties, hours, pay, schedule, or discipline because they filed or took part in a claim. That's where retaliation liability lives.
• Don't treat a denied claim, an inconsistency, a prior injury, a delayed report, or social-media activity as automatic proof of fraud.
• Don't promise that a report will lead to denial, discipline, prosecution, or repayment. You don't control the outcome.
• Don't rely on this article as legal advice. Consult counsel for state-specific fraud statutes.

Follow those rules, and you protect both the integrity of a real investigation and your own business. Speaking of outcomes, it helps to understand what can actually happen once fraud is established.

What Are the Consequences of Workers' Compensation Fraud?

The consequences of workers' compensation fraud depend on who committed it, what they did, how much money was involved, the state, and the authority handling the matter. They range from administrative corrections to criminal prosecution.

Importantly, not every report leads to a penalty. Many concerns turn out to be errors, misunderstandings, or claims that simply couldn't be proven. Consequences attach after fraud is established by the right authority, not when a suspicion is raised.

Consequences for Employees or Claimants

When claimant fraud is proven, possible outcomes include loss of benefits, repayment or restitution of amounts already paid, fines, and, in serious cases, criminal charges that can rise to a felony once a state's dollar threshold is met. Employment consequences and civil liability are also possible.

The specifics vary by state and by the facts of the case.

A minor misstatement and an elaborate scheme to collect benefits while working elsewhere are not treated the same way, and the authority handling the matter weighs intent and financial impact heavily.

Consequences for Employers or Policyholders

When premium fraud is proven, employers can face premium repayment, penalties, coverage consequences, civil liability, and even criminal charges. Regulators and carriers take deliberate payroll understatement and worker misclassification seriously because it shifts costs onto honest businesses.

The line here matters as much as anywhere.

An intentional scheme to hide payroll is fraud, while a classification error your audit catches and corrects is a routine correction. Ordinary payroll and classification mistakes are resolved through corrections and adjustments, not prosecution.

Consequences for Medical Providers and Other Professionals

When provider fraud is proven, consequences can include repayment, civil penalties, exclusion from insurance or government programs, professional discipline or loss of licensure, and criminal charges. Billing-related schemes and false records are common bases for these cases.

As with the other categories, an outcome follows a finding, not a referral.

A single report doesn't automatically end a provider's career; it triggers a review, and the consequences depend on what that review establishes. The better long-term strategy for any employer isn't chasing penalties after the fact. It's reducing the odds of fraud in the first place.

How Can Employers Help Prevent Workers' Compensation Fraud?

Accurate records and clear processes are the most effective fraud prevention—they make fraud harder to commit and honest claims easier to verify. The goal is to reduce risk over time without ever discouraging employees from reporting real injuries.

That balance is the whole game. Scare people away from reporting legitimate injuries, and you trade a small fraud risk for a much bigger safety and liability problem.

Practical controls that make a measurable difference include:

• Clear, prompt injury-reporting procedures. When everyone knows to report immediately, you get accurate, timely facts and fewer of the timing gaps that muddy a claim.
• Supervisor training on objective incident documentation. Managers who record what happened, factually and right away, prevent the inconsistencies that later look like red flags.
• Accurate payroll, classification, job, schedule, and timekeeping records. Clean records prevent honest premium errors and make genuine problems easy to spot.
• Consistent claim communication. Staying in appropriate contact with an injured worker reduces misunderstandings and speeds recovery.
• Record retention procedures. Keeping complete, organized records means you can respond to authorized requests without scrambling.
• Return-to-work procedures. A structured, modified-duty program gets employees back safely and removes much of the incentive and opportunity for exaggeration.
• Consistent employment policies. Applying rules the same way for everyone reduces both real disputes and the appearance of retaliation.
• Early coordination with your PEO, carrier, or claims administrator. When information is incomplete or inconsistent, raising it early gets you guidance before a small issue becomes a big one.

Notice that these controls center on accuracy, consistency, and communication, the same things that lower claim costs and improve outcomes for genuinely injured workers. For many small and mid-sized employers, though, building and maintaining all of this in-house is a heavy lift, which is where a PEO comes in.

How Can a PEO Help Employers Address Workers' Compensation Fraud?

A professional employer organization (PEO) is a firm that partners with businesses to handle HR, payroll, benefits, and workers' compensation, giving employers expert support and access to pooled coverage. When a fraud concern arises, a PEO helps because the response cuts across incident reporting, claims, payroll, classifications, HR records, and employee communication all at once, which is exactly the kind of coordination small teams struggle to manage alone.

A PEO supports the process at the points where employers most often get stuck, working alongside your judgment and the investigating authority.

Depending on your service agreement, a PEO like FrankCrum can support you by helping with:

• Initial injury or claim reporting, so incidents are captured accurately and on time
• Identifying the right claims contact, so your concern reaches the correct person or authority
• Coordinating with the workers' compensation carrier or claims administrator, including any special investigations unit
• Collecting and organizing payroll, classification, employment, timekeeping, and incident records that a review may require
• Risk-management guidance on documentation and the prevention controls above
• HR guidance on confidentiality, consistent policies, employee communication, and avoiding retaliation
• Record retention and responses to authorized requests for information

FrankCrum brings an added advantage here. Through its affiliated, AM Best-rated carrier, Frank Winston Crum Insurance, FrankCrum handles workers' compensation, payroll, and HR under one roof, so incident reporting, claims coordination, classification accuracy, and HR guidance don't sit in four separate silos.

One honest caveat: exactly what a PEO can do depends on your service agreement, your workers' comp arrangement, the carrier's procedures, your state's law, and the facts of the specific concern. A PEO is a coordinator and guide, not a substitute for your carrier's investigators or the relevant authorities. Always confirm how responsibilities are divided under your own agreement.

Handle Fraud Concerns the Right Way

Workers' compensation fraud is real, but it's also narrow, intentional, and far less common than red-flag listicles suggest. The employers who handle it well are the ones who hold a simple line: a warning sign is a reason to document objective facts and coordinate with the right party, never a verdict to act on alone. Keep the claim moving, avoid retaliation and privacy mistakes, and route genuine concerns through your carrier, PEO, or the appropriate state or federal authority. Do that, and you protect your business, your honest employees, and the integrity of a system everyone depends on. A strong PEO partner makes that discipline far easier to maintain.

Frequently Asked Questions

What is considered workers' compensation fraud?

Workers' compensation fraud is a knowing, intentional act of deception involving a workers' comp claim, benefit, premium, or payment. It can mean faking or exaggerating an injury, hiding outside income while collecting benefits, understating payroll, misclassifying workers, or billing for care that wasn't provided. The defining element is intent. Honest mistakes, disputed claims, and denied claims are not fraud.

Is a red flag proof of workers' compensation fraud?

No. A red flag is a fact, inconsistency, or pattern that may be worth documenting or referring for review, but it never proves fraud on its own. Common red flags like delayed reporting, no witnesses, or a prior claim also appear in legitimate injuries. Employers should record objective facts and let the appropriate authority determine whether fraud actually occurred.

How do I report suspected workers' compensation fraud?

Start with your carrier or claims administrator, who usually has a special investigations unit and a referral process. From there, you can contact your state workers' compensation agency, your state department of insurance or fraud bureau, or the NAIC Online Fraud Reporting System. Federal program fraud is reported to the U.S. Department of Labor Office of Inspector General. A PEO can help you identify the correct channel.

Can I fire or discipline an employee I suspect of workers' comp fraud?

You should not change an employee's job, pay, schedule, or discipline because they filed or participated in a workers' compensation claim, even if you're suspicious. Doing so can create serious retaliation liability. Keep handling the claim normally, document your factual concerns, and refer the matter to your carrier, PEO, or the appropriate authority for review.

How common is workers' compensation fraud?

It's difficult to measure because sources count different things, from confirmed convictions to suspected cases to avoided premiums. Estimates range widely, from as low as 1-2 percent of claims in rigorous studies to much higher figures reported by some prosecutors' offices, while employer perceptions run even higher. The key takeaway is that the vast majority of claims are legitimate, and no single percentage captures the whole picture.

What are the penalties for workers' compensation fraud?

Penalties depend on who committed the fraud, the conduct, the amount involved, and the state. Claimants may lose benefits and face restitution, fines, or criminal charges. Employers who commit premium fraud may owe repayment and penalties or face prosecution. Providers can face repayment, exclusion, loss of licensure, and criminal charges. Not every report leads to a penalty, since consequences follow a confirmed finding.