Why Fraud scares Investors buying invoices David Gustin - March 11, 2014 7:05 AM | Categories: Legal & Regulatory, Risk Management | Tags: invoice fraud I was taught that the odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are quite high. I was reading the WSJ the other day and noticed on the front page that a distinguished law firm had fooled its accountant and banking group for close to four years by overstating revenue and other book cooking. Why did Dewey & LeBoeuf LLP, a 3000 person global law firm allegedly cook the books as described in the WSJ article? Dewey & LeBoeuf were about to violate the terms of their bank loan. You see, it comes down to working capital. A big firm like that probably saw revenue challenges during the financial crisis, and yet continued to want to portray a global legal firm without drastically cutting expenses or making strategic adjustments. To do so, they needed bank lines to cover cash gaps. In the 106-count indictment, the Manhattan District Attorney's office stated the firm was $50 million short of meeting the requirements of its bank loan. The indictment stated in order to goose the firm's numbers and stay in its creditors' good graces, the SEC said the firm's leaders marked down simple reimbursements as income, deliberately understated expenses and asked clients to backdate checks. The leaders also mischaracterized millions of dollars in credit-card debt as disbursements owed by clients, the SEC said. Now you can see why lenders are freaked out to provide lines, factor receivables, or otherwise provide transactional finance. If a reputable law firm can do it, than why not a small or medium no known enterprise? If a reputable firm’s accountants cant pick up the fraud, why would anyone else? The two primary types of fraud experienced by investors are: Conversion Bogus Receivables It is not easy to catch the above fraud. But with supplier or B2B networks, the buyer has accepted an invoice, vastly reducing the chance of a fraudulent invoice. Related Articles Voices (4) David Gustin: 23.03.2014 at 3:07 pm Thanks Tony. I just wrote about the double dipping issue with Reverse Factoring programs. Yes, China is full of challenges. In a domestic situation, Supplier Networks can definitely help here because you can check if there are liens attached to the receivables. And the size of the prize is so big, you don’t have to start with something as challenging as China. Reply Ken Adams: 12.03.2014 at 6:28 pm Hi, can you elaborate on the last paragraph. Why if the buyer has accepted an invoice does it vastly reduce the chance of a fraudulent invoice? Reply David Gustin: 14.03.2014 at 9:05 pm Sure Ken, when a buyer has received and then validated an invoice based on whatever criteria they use (it could be much more sophisticated than simple 3-way match), and if this invoice is tied to a supply contract and Master PO (or maybe its a non PO based invoice), the only way you could have fraud if it someone in your internal organization was involved. This can certainly happen, but unlikely yet impossible to eliminate. Reply Tony Brown: 20.03.2014 at 5:18 pm David, granted the confirmation/acceptance of an invoice by the buyer would reasonably mitigate the risk of the invoice itself being fabricated (short of collusion between the buyer and seller). But even if the buyer accepted an invoice, this doesn’t prevent a desperate/dishonest seller from double financing that invoice. It’s precisely the financial predicament faced by the law firm that leads some borrowers to commit fraud to survive. I’m not sure that supplier or B2B networks alleviate this risk. It’s still a major concern under SCF/trade payable financing and requires the lender to undertake considerable due diligence in the seller’s country. If that country is China, it’s pretty challenging. Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.