One of the most important aspects in executing the functions of a credit manager is to keep one’s eyes open, especially for the possibility of a fraudulent situation. Although there are countless examples of how fraud can rear its ugly head from internal and external sources, allow me to share one story with you about how a very curious credit manager was able to put a stop to a significant fraud scheme.

When this credit manager was hired (the company has about fifty employees), about eight months before she told me the story, she was informed that the general sales manager was often calling the shots at the organization, even when it came to credit. Although the credit manager was technically reporting to the accounting manager, as orders where coming in and she was very diligently trying to follow the credit manual put in place by the previous credit manager, sometimes her credit decisions were being overridden by the general sales manager. In other words, when an order came in and:

  • it exceeded the credit limit
  • contained unit prices significantly cheaper
  • lacked certain information such as confirmation of payment terms
  • did not follow standard operating procedure

The credit manager would send the order back to the area sales person for additional confirmation. However, within a day or sometimes just a few hours, the order would be sent back with the general sales manager’s instructions to approve it. Although the credit manager discussed these overrides with the accounting manager, the general sales manager’s decision was final.

So from the beginning of her employment, it wasn’t just a couple of orders that were outside of the credit controls but several that seemed to be following a pattern of getting overridden and approved by the general sales manager. Each time the credit manager was forced to let the order go through, she had a bad feeling about it and kept thinking “Something is just not right here.”

After working there only a couple of months and having that gnawing feeling, one evening the credit manager stayed late to closely examine the several dozen orders that had been overridden since her arrival. She looked at all the documentation very carefully and here’s what she found:

  • The overridden credit decisions pertained to five customers within a radius of about one hundred miles of her company. Considering her company was selling on a nationwide basis, and the overridden orders were all coming from five local customers, this was very peculiar.
  • Going back into the credit files of these customers, she noticed that credit reports, trade references, and other substantiating credit documentation for the credit applications were missing.
  • Upon examining billing and payment records for the past few years, it showed these invoices always had product unit prices about 25-30% cheaper than what was being charged on other customers’ invoices.
  • As these five customers always paid on time, they never showed up on a past due list that would have involved the company’s part-time collection staff person.
  • In trying to verify the companies’ legal status, the credit manager confirmed their corporate registrations through the Secretary of State Business look-up portals and, of the five, four were not listed.
  • Getting ever more suspicious, the credit manager went on Google Maps and discovered that the five customers were residential properties. Three were homes and two were small apartment buildings with only two or three units.
  • The customer names were all businesses sounding, like ABC Electric, which included a suite number in the address line to give a corporate sounding appearance.
  • In finding the representatives of three of the five customers on Facebook, the general or district sales manager showed up in the list of friends.

In short, the credit manager surmised she had perhaps uncovered a scam where the general and district sales managers had roped in certain people to front as businesses, through which they purchased their company’s products at a significant discount, and most likely resold them somewhere making a small but steady profit.

Based upon her investigation, the credit manager approached the president with her evidence. The president, a very nice man in his early eighties, who had established the company almost fifty years earlier, had relinquished control of the daily operation to his long time and “trusted” general sales manager.

After carefully reviewing her findings, the president contacted his corporate attorney, who thanked the credit manager for her work, and they took the matter over from there. Within a day, the general and area sales managers, as well as the accounting manager, were gone from the company and shortly thereafter were indicted on fraud and embezzlement.

As I listened intently to this story, the credit manager summed up how this fraudulent situation was able to get off the ground.

  • First and foremost, there was a complete breakdown in the internal controls that allowed for collusion.
  • The general sales manager, a long time employee with a previous track record of success, had created an aura of unquestionability at the company. It was an accepted fact that when he decided something, one did not question it.
  • As the president grew older, he was spending more and more time away from the daily operation and by entrusting it to the general sales manager, he was out of the loop.
  • The former credit manager was cowed into following the general sales manager’s approval requests and did not pursue or question the frequency of orders being overridden.

When the dust settled, the president was not only very grateful to the credit manager for uncovering this terrible situation but also subsequently elevated her to the position of controller to establish, maintain, and strengthen the company’s internal controls so this kind of fraud would not be repeated.

The bottom line is that we can never stop being vigilant, asking questions, and making sure that the activities of everyone in an organization makes sense and add up to always protecting and supporting the company’s best interest.

This article was edited by Steven Gan.

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