Could you spot an issue with a credit facility? Leigh Lones, U.S. Director of EQ Riskfactor, shares what to look for in order to limit potential losses and how robust controls, systems and staff member training can mitigate risk.
Fully drawn facilities
Heavy utilization can be an early indicator of fraud. There are many reasons why a business may need to regularly draw upon resources, such as resourcing periods of fast growth or covering temporary labor suppliers working on tight margins. When fraudulent activity is underway, full utilization is a common feature, especially when new borrowing is being used to repay falsified invoices.
Increased credit notes and fall in collections
This can be a sign of deteriorating product or debtor quality, which is concerning in itself. The underlying causes should be carefully assessed, as the real contributor could be fictitious invoices being credited out before they are overdue. Over time, typical levels of credit notes and collections can be assessed for each client and benchmarked against similar clients in the same sector. Deviations should be investigated, and individual credit notes checked.
Late submission of monthly returns
Fraud tends to appear in a limited number of forms. In addition to false invoicing, diverting collections to another account, moving aged balances into current months, misallocating receipts and lacking submission of credit notes are other examples of fraudulence. Sales ledger manipulation can be spotted when returns are submitted at the end of the month, so those committing fraud oftentimes will delay their submission.
Timescales for submission must be clear, enforced and particular care should be taken in the analysis of late returns.
Cancelled or delayed field exams
The field exam gives lenders the opportunity to closely see how their clients’ businesses operate and to sample check transactions. Because of the depth of the testing and the need to see original documents, fraudsters have every reason to believe they will be uncovered.
Field exams are a powerful fraud deterrent, and the tests are designed to spot one in action. So, the fraudster will do what he or she can to avoid it or thwart it while the field exam is in progress.
Look out for last minute cancellations, unavailability of key files or people on the day of the exam or attempts to divert attention to irrelevant areas.
Staff member turnover or change in management behavior
Generally, it is the business owner who will start the fraud and make sure it continues; however, an owner cannot typically begin fraudulent activities without assistance. Others with no stake in the business become involved. Often, they will leave rather than be drawn into criminality or be dismissed for refusal to help.
As the fraud continues, pressure mounts and management behavior will change, likely linked to trading losses and creditor demands. Staff member turnover may follow; watch for complaints, lack of information or cancelled meetings. Behavioral signs are more telling than what the reports are indicating.
To successfully combat the risk of fraud losses, lenders need well trained and experienced staff members, and above all, systems to spot unusual trends in client facilities. Equip your business with an overarching set of documented risk polices, including reporting requirements, escalation procedures and management oversight to help mitigate risk.
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