TIPS ON FIGHTING FRAUD

Byline: Jeff Siegel

NEW YORK--Suppliers looking to cut losses due to customer fraud have to be vigilant, look beyond attempted smokescreens and examine the nuts and bolts in order to get the true picture of a company's credit worthiness.
That was the advice offered by two apparel industry experts--a lawyer and a banker--as they addressed a meeting of credit managers here recently.
Financial fraud was the topic at the New York Institute of Credit's 17th annual Credit Smorgasbord, held at the New York Hilton, and the two speakers were Sheldon Silverberg, a partner at the bankruptcy law firm Silverberg, Stonehill & Goldsmith, here, and Harvey S. Gross, vice president at NationsBanc Commercial Corp.
The two suggested three general techniques to guard against fraud:
Ask to see current financial statements instead of relying on institutional ratings.
Check the trail of financial figures to see if the company had enough raw materials to ship the stated level of goods.
Most important, undertake surprise audits to check on the truthfulness of financial data.
"You have to take a look once in a while," said Silverberg, referring to surprise audits.
Asking for proofs of shipment, a common means of verification used by factors and credit people is usually effective, he said, but "can be falsified" and can't be relied on by themselves.
On top of the fraud hit parade, Silverberg said, is filing false financial statements, otherwise known as cooking the books, and inflating the amount of receivables or inventory.
Gross agreed, saying receivables fraud is probably the most common because it's the easiest. "All you have to do is just give someone a piece of paper and you get money in return," he told the credit managers.
By contrast, he noted, inventory fraud is more difficult to engineer because you have to actually buy some merchandise and then keep moving it to make it appear that there is more inventory than actually exists.
Like Silverberg, Gross is a strong proponent of the audit. However, he pointed out that an audit is only as good as the auditor: "Auditing is always a good idea, but the quality of the audit is another thing. You have to know what you're doing."
Both told credit managers they should get as many different kinds of proof as possible and not rely on just ratings, inventory levels or accounts receivable.
The speakers and many of the credit managers in attendanc, agreed that one mistake credit executives often make is trusting figures provided by financial institutions instead of asking to see current financial statements.
Relying too much on credit ratings is a bad idea, Gross said, because the information is not always accurate and provides no real depth. "You need to see the financial statements so you can do some analysis," said Gross, who noted that many credit people don't perform a thorough analysis because "they don't have the time."
Another good idea for those looking to spot a fraud, said Gross, is to look for a "flow," or the trail of financial figures from when the raw material is bought to the time it is shipped.
If accounts payable are running considerably smaller than the amount of goods reported shipped, "you need to ask how," Gross said.
While every company probably has a horror story of being taken in by fraud, Silverberg and Gross said there is no way to quantify the amount of fraud in the apparel industry.
At the same time, though, they said, fraud usually increases in hard times. "It's always a bigger problem when business is not good," said Silverberg. "Bad business turns people desperate."
Another problem faced by the credit community with regard to fraud, Gross and Silverberg said, is the lack of stiff penalties for fraud and the ho-hum attitude of law enforcement officials.
"Where there's no violence, there's no priority," Silverberg said.
"There's no deterrent, such as jail sentences or punitive damages," agreed Gross, who said the only people who are really punished are the companies that are defrauded and the employees that lose their jobs as a result.--Fairchild News Service

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