By Dean Kaplan+
When a company is considering extending credit to a potential new customer, careful credit and financial statement analyses are paramount. Even with careful examination, however, sometimes a customer will become delinquent and debt collectors might be called in to collect. This is the third article in a six part series of articles about the business of fraud. This article will focus on how to identify a fraudulent company by its credit references and financial statements.
Part of any credit application is a list of credit references supplied by the potential new customer. When determining the credit worthiness of a customer, calling and talking to each reference is important. Below are some ways that scammers can fake credit references:
a. When placing calls to references, be suspicious if the person contacted immediately launches into a glowing reference without a moment’s hesitation to even locate a file.
b. Bank references can be falsified. If the bank reference is a phone number with an extension and a person’s name to ask for, this can easily be a friend of the scammer who is told what to say and what accounts to reference.
c. Ordinary answering services can be used to provide false references.
d. Be wary if the only way to request references is by sending a letter via fax machine. The fax number may be at a central location where many reference requests are sent and the responses can be sent out on a variety of different letterheads.
When credit references seem suspicious, below are some actions that can be taken to verify the legitimacy of the reference:
a. Confirm the reference company truly exists by finding a yellow pages listing or other reliable outside source for the company.
b. Attempt to obtain the phone number given for the company by calling directory assistance. If the phone number seems legitimate, make sure that the person you speak to actually works for the company and is in a position of authority.
c. Check that the company reference is a business that is an industry that would logically do business with the potential new customer’s business.
d. If the reference is an 800 number, request the local phone number from the potential new customer and call it to confirm the location and existence of the company reference.
When a potential new customer provides financial statements as part of its credit application, do not simply look at the bottom line or the cash amount. Below are some additional things to look at that may identify questions that need to be answered before credit is extended.
a. Anytime the accountant’s statements are randomly dated, this is a red flag because usually these statements are prepared at month-, quarter-, or year-end.
b. If the company’s assets are impossible to verify this may be a red flag. These would include marketable securities and real estate. In addition a very high accounts receivable number or a large amount due from principals should be verified.
c. Verify that the accountant actually exists and is licensed. Also check if the accountant is from a different state than the state where the potential customer is located.
d. For a new business, give careful consideration to the net worth and capital numbers to confirm that they make sense when taken together.
If the financial statements seem suspicious, below are some additional things to look at before making the decision to extend credit.
a. Look at the assets and find a reliable outside source to confirm they exist. Be sure that the accounts receivable number seems consistent when compared to the annual sales number.
b. Check the credentials of the accountant who prepared the financial statements.
c. If the statements show large assets but little or no debt, this is a red flag.
d. Call the primary bank of the customer and ask for the average balance. Compare this number to the cash number on the balance sheet. They should be comparable.
Once you have carefully evaluated the references and financial statements hopefully the decision to extend credit will be fairly easy. If something seems not quite right, then trust your instincts and keep digging.
Debt collectors don’t typically check credit references; however, they frequently evaluate financial statements prior to making a debt collection call. Once a customer has gone delinquent, it is quite common for a credit department to turn over accounts to collection agencies when in-house collectors have been unsuccessful in their debt collection efforts. When an account is turned over to a collection agency, the collection agency spends a fair amount of time understanding the customer and the debt collection situation. Often, if a customer is fraudulent a key to the debt collection is finding the customer. One of the problems with fraudulent companies is that they are very good at scamming and then disappearing. Collection agencies are used to finding debtors, and they have state of the art techniques for debtor location. This along with the fact that collection agencies hire only professional collectors gives collection agencies a significantly higher debt collection success rate than in-house collectors. When dealing with fraudulent customers, collection agencies may be a very cost-effective way to maximize debt collection success.
Click here if you are ready to go on to the next article in the series Debt Collectors And Fraudulent Companies 4 Of 6.
And be sure to check out the rest of the articles in this series:
- Types of Fraud
- Commonly Scammed Businesses and Fraud Red Flags
- How to Identify A Fraudulent Company
- The Unsolicited Order Scam
- Unmasking Ownership
- Bankruptcy Fraud
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.