Joseph D. Meddings, Certified Turnaround Professional

Thankfully, most people want to do a good, honest job for their employer – but every once in a while you run into instances where that just isn’t the case.  For this article, I am going to focus on Accounts Receivable fraud, and what you should do if you suspect it.

First things first, gather the evidence.

Do this for a myriad of reasons, but gather all the underlying documentation that supports the generation of invoices, payments made to the company, and credits that are generated.  If possible, move them to a secure place where access is limited.  Next, hire an outside IT firm to come in and mirror your overall system, and then the individual computers / laptops of those directly related to the accounts receivable function.  Initially, you may not know who or how many people are involved in the potential fraud, so gathering more information and documentation is better than gathering less.  It is even better if this can be done after hours so as not to alert the potential perpetrator that you are suspicious.  And don’t feel comfortable that you have all the IT information – make sure you get all the paper documentation as well – sometimes the perpetrator will take the time to alter electronic files but leave the “hard” files alone.  Sounding a little like a crime show?  It should – fraud is a serious crime that impacts more companies that you think.

What the experts say about fraud.

Experts estimated that organizations lose 5% of revenue to fraud each year – take a second and do the math for your own company.  In an accounts receivable based fraud, there are several different ways that fraud can be performed:  Skimming (taking cash off the top prior to recording), lapping (misapplying payments), write-off schemes, refund schemes, unrecorded or understated revenue schemes.  This list of accounts receivable fraud schemes has been around for centuries.

The Interview Process.

Once you have all the documentation, both electronic and paper-based, secured, it is time to move on to the interview process.  It is important to start from the bottom of the accounts receivable organization and work your way up – and don’t forget to interview employees that are working in the same general area.  For the most part, people want to do what they get paid for and do it well.  Employees will notice that someone is not doing something right, and most are eager to tell someone that will listen.  During your interview, make sure that they know that anything they tell you will be Anonymous – you will be surprised what you learn.  For an even more successful and insightful interview, try to make it as casual as possible.  People will open up more when it doesn’t feel like an interrogation and they are comfortable.

My guess is that you will know what is going on long before you reach the top of the accounts receivable organization.  What things should you be paying attention to in an interview?  Again, experts say that at least one of these factors are involved in a fraud case: 

·         Living beyond means ·         Financial difficulties ·         Unusually close to a customer ·         Excessive control issues / unwilling to share duties ·         Unusual or increased irritability or defensiveness ·         General “Wheeler-Dealer” attitude ·         Recent divorce or family problems 

Get some assistance.

Finally, consider hiring some outside expertise in investigating and uncovering suspected fraud.  This process can’t stop the main business that your company is in, and a proper evaluation of the evidence may suggest that this has been going on for some time – the average fraud continues for 14 months before it is eventually detected – and a review of past records may be in order.

Joe Meddings, CTP is the President and CEO of Hollis Meddings Group, a strategic advisory firm that assists companies that are experiencing operational or financial distress.  Hollis Meddings Group specializes in family or closely held organizations with $10 million to $500 million in revenues.  He is a member of the Turnaround Management Association (“TMA”), and sits on several Boards including the Connecticut Chapter of the TMA.