They say a truly honest man is one you can play craps with over the phone. Today’s headlines make us wonder where the honest people in business have gone.
We are all familiar with the basic facts surrounding the Martha Stewart case. If you are like me, you found her recent conviction on all charges both startling and baffling. How could someone so revered and trusted in the public eye suddenly be convicted of crimes of deception. Why would she risk so much for a relatively small gain.
More importantly, what lessons can we take from this to our daily life as a credit professional? Who can you trust? How can the CMA help?
There are many lessons here and they are more relevant today than anytime in the past.
Why Should I Care?
The National Association of Credit Management (NACM) Asset Protection Group (APG) estimates the following costs of fraud in the U.S.:
- Business identity theft grew 70% from June 2002 to June 2003.
- Suppliers take in more than $18 billion in bad checks annually.
- Fraud cost American companies $400 billion in 2003.
- The U.S. Chamber of Commerce reports that $50 billion is lost annually due to employee theft and fraud.
Do you really know what the cost is for your company?
What is Fraud?
Fraud comes in many forms. It can be an internal issue precipitated by a trusted employee, or committed by an organization or individual purchasing your company’s products or services. Fraud occurs when the perpetrator intentionally misleads the offended party into a false sense of confidence. (i.e. “con”) Once a fraud is discovered, it is typically of great surprise to the victim. It is typically the employee you least expect or a company you trust. As a result there is lax adherence to the processes and controls that can effectively deter fraud. The door is open.
Even more alarming is the extent that fraud may occur under our nose and it is not discovered. For example, does your company have appropriate internal controls? When a debtor files for bankruptcy protection do you pursue the debt through the bankruptcy process or, is your company writing off balances where deliberate fraud may have occurred? Does your company pursue small balances or, do you have a threshold under which you just write-off the balance, with no efforts to collect? These policies may seem like the most practical approach to an overworked and understaffed organization, but are they inviting the opportunity for your company to become a victim?
Aside from check, or credit card fraud, there are three categories of fraud of premier importance to the credit professional:
Organizational identity theft: The perpetrator assumes the identity of a legitimate company.
A “Shell” Company:A shell company may have a website, sophisticated promotional materials, be registered as a business, have a telephone listing with directory assistance, provide fake bank and trade references and can be found on credit reports based on false information they provide. Once they have established credit with the victim company and receive product, they close their doors and disappear, bills unpaid.
“Bust Out”:The perpetrators seek to establish a significant credit relationship with victim companies. They may either acquire a company with a good reputation or start a new company. A target could be a family business being sold after the retirement or death of the long term owner. The product line changes to goods that are easily sold. This has been made easier in recent years with the coming of on-line auction services. Products sold may have no relation to the traditional business of the company or its name.
Months may go by. Product is ordered, bills are paid. Then a large order is placed, shipped and billed. You guessed it, the debtor disappears.
How do Seemingly Honorable People Commit Fraud and Get Away With It?
The “Three E’s”: Error, Ego and Economics give insight into how fraud is allowed to happen. What motivates an individual to commit a fraudulent act, even if, from an outward appearance, it seems unlikely they would do so?
Errors Enabling Fraud
To “Error” is human. People in business make mistakes. Decision making is about choosing among alternatives and taking risks. In today’s fast paced environment choices have to be made rapidly, sometimes with minimal time for research and thought.
The credit decision making process can either prevent or open up the possibility of fraud.An honest mistake is one thing. However an ill informed mistake could cost you your credibility and even your job. It is more important than ever to be honest about what you do and don’t know. If needed, seek out reliable resources that can rapidly keep you informed. The CMA Trade Credit Groups and Anscers are available to help you. On-line Requests for Information, “RFI’s”, give you immediate access to your industry peers to clear accounts. The Encyclopedia can help you keep informed. The Community Bulletin Board offers you an opportunity to post questions and receive immediate advice and comparative approaches from other credit professionals.
Credit professionals today have a serious dilemma. On the one hand there is tremendous pressure to help our companies build market share and increase revenues. On the other hand, we must manage reasonable risk with minimal staff and resources.
Fraud is facilitated by the perpetrator’s knowledge of these pressures. They also know many creditors are not trained to recognize the danger signs for fraud.
In today’s competitive environment, credit decisions commonly focus on three elements: the financial viability of a debtor, the documentation provided and the projected revenue stream expected from sales to the debtor. The fraud victim may not take the time or have adequate processes to confirm either the accuracy of the information provided, or the honesty of the debtor. This opens the door for a fraudulent debtor to alter information sufficiently to secure credit approval. Unfortunately credit professionals must maintain a healthy degree of skepticism toward a new or problematic customer and any information they provide.
The second “E” is “Ego”. This can blind us from the facts and consequences of our actions. “Ego” oriented decisions are relevant to credit professionals from two perspectives. Don’t let your ego get in the way of a tough decision. It is a changing world out there. Realize the facts may change surrounding a position you have taken on an issue in the past. The circumstances may have changed for a debtor company you have supported. Step up to the facts at hand and do the right thing.
Also, watch out for principals of customer companies who let their “Ego” get in the way. The executives now being tried and convicted for their misdeeds are poster children for this one.
I once sold to a medium sized distribution company with an owner who felt he had the magic touch. After some successes he started buying smaller competitors with borrowed money. He felt he could do no wrong. Well, the obvious happened. He made some bad choices, couldn’t meet his obligations and filed Chapter 7. His decisions were blinded by his “Ego”.
The third motivator is “Economics”.The desire for personal gain along with a blinding ego is a great formula for deceptive business practices and fraud. WC Fields once said, “A rich man is nothing but a poor man with money.” Don’t let someone in expensive clothes, an elaborate office, or a seemingly prestigious company deceive you.
Unfortunately, the recent conviction of Martha Stewart and other top executives is an example of a growing problem in business today. Business fraud is something all of us will face at some time in our career. It could manifest itself as check fraud, a misstatement of a company’s financial status, a break out operation, a catastrophic embezzlement by a trusted employee or in many other forms. We have to be constantly on the look out and aware of when a fraud is a possibility.
The “Triangle of Fraud” helps explain how a fraud friendly environment can exist.
On one side of the triangle is “Pressure”. This can be economic pressure, an individual or company has desperate financial problems. Perhaps an individual or a family member has severe health problems, a substance abuse issue or gambling debts. This leads to the pressure needed to motivate, even apparently honest people, towards fraud.
The second side of the triangle is “Rationalization”. “My company is small and I am defrauding a large company. Anything I get from them will be immaterial.” Or, “I will just do this once and never again”, or “just once more and never again.”
For fraud to be successful, “Pressure” and”Rationalization” must rest on a base of “Opportunity”. There is “Opportunity” for fraud and deception when a company has lax controls, no checks and balances, or bases credit and collection policies on a belief the “unbelievable” will never happen.
This is another inherent value to the CMA. The CMA is your professional association. It is an organization that is in the game for YOU. It provides access to timely information to keep you informed. Comparison among your peers on “best practices”, the Lien Filing Services, the Collection Division and the Adjustment Bureau can all help you keep informed and swiftly react to the growing fraud issue.
CMA Business Credit Services is managed for and by credit professionals to provide a credible resource. This will not eliminate those situations when the “unbelievable” happens, but it will provide you the best tools available to minimize the impact on you and your company.