Trust but Verify
Trust but verify is an age old adage. It been around since the dawn of civilization. In the old days not verifying who a stranger was, not verifying rumors created by local politicians and rumors of a pending armed conflict could and would end up getting you killed or worse. Your kingdom could be captured by a brutal dictator, your wife and children could be sold into slavery. Well, you get the picture which is not a pretty picture indeed. The modern day shaking of hands was first used in medieval times by knights as a way to prove that they didn’t have a weapon concealed in their glove just wanting to plunge it into an unsuspecting advisory, an adversary who didn’t take the time to verify.
In modern times, many of us have to verify statements to see if what is being presented to us is true or not. The police detective investigating a crime. Suspects are identified. “Where were you the night of………” is a line that is heard in just about any crime show or movie. The suspect always says that he/she was somewhere which would make it impossible for that person to have anything to do with the crime being investigated. Imagine if the detective just simply took the suspects word for it! Oh, Mr./Ms. Smith, you were out of town visiting your sick aunt Millie you say, well then, I guess that clears you of have anything to do with the crime! You’re free to go on your merry way and so very sorry for bothering you! So, your saying that is ridiculous and of course that would never happen and you would be correct. Of course the detective is going to ask were this aunt Millie lives and how he/she can get a hold of her to collaborate the story. The detective may have no reason to think the suspect was not in fact out of town on the night of the crime, but it must be verified.
A private detective may be hired by an attorney who has a client that suspects that their spouse is having an extra marital affair. The client is so certain of this that she wants to file for a divorce. They may state something like, “he has been coming home smelling like perfume”. Or, “he says that he has to work late every night”, Perhaps the client is suspicious that their spouse has started paying more attention to the way he dresses, personal hygiene and he has started working out. These all must be sure signs of an affair the client says. “I can’t believe that after all these years, all the sacrifices I’ve made to the sake of our marriage that he could do this to me!” The client is seething with rage and not only wants a divorce, she wants to punish him, to hurt him, to destroy him and that awful woman that he has been cheating on with her. Now, the attorney wants to help his client, to protect her and get her justice! He wants to get his client the best possible financial settlement that he can for his client so that she can get on with her life. So she can pick up the shattered pieces of her life and rebuild, to find happiness and maybe, just maybe find true love.
The attorney trusts what his client is telling him, he believes her. Why wouldn’t he? She is sincere as heck, is visibly shaken and emotionally upset. However, the attorney knows that in order to obtain a divorce settlement that is as generous as possible he will need proof that there is in fact infidelity going on, in other words the attorney will need the PI to obtain proof, to verify the client’s allegations. The PI will need to find the smoking gun. Time stamped photos of the spouse pulling into a motel, meeting the other woman, and going into a room and closing the door. Photos of the spouse displaying gestures of affection in public, holding hands, kissing, etc… The surveillance undertaken by the PI and evidence gathering is what is need to either verify the client’s claim or not.
Us credit pros are faced with lots and lots of decision making situations on a daily basis. Important decisions that can and will impact the company either beneficially or adversely. We run credit reports, we call trade references, we contact the customer or prospect’s banking relationship. But sometimes we don’t. Sometimes we are under the gun so much so that we may just run a credit bureau report, obtain a credit score and assign a line of credit. Why not. The sales rep is badgering us to approve the sale. “What are you, the sales prevention department the salesperson blurts out. Come on, they’re good for it, I can vouch for them. I need this sale!” All of us in the credit world have heard this or something like it time and time again. So, we cave and pull the credit report and assign a line if their credit score is decent and that’s where the due diligence ends. We release the order presto, bingo and move on to the next call, the next new account, the next call to a customer who is past due and their order is on credit hold and so on and so on.
But have we ever thought to even verify that the business on the credit application is in fact who they say they are. Do we check to see if the address on the application matches the address on the credit report and does the ship to address supplied on the purchase order match the address that the business gave on the application. Do we verify the principle owner listed on the application is in fact the real owner? Do we take the time to visit the secretary of state web site to verify that the company actually exists at all? That the name of the owner on the application is in fact the owner named in the corporate filing? We hear all the time about identity theft. Hacked social security numbers, hacked bank accounts. Scams of every conceivable form. Yes, we are constantly hearing about it and for good reason. Identity thieves wreak havoc in our society and cost consumers and merchants billions of dollars a year in the US alone. But do us credit pros ever think about commercial identity theft? If not, we most certainly should. I will now go into an examples of commercial identity theft that cost a client of mine over $150,000 in losses which could have been easily spotted and quashed before the damage was done, but didn’t. Please do not let this example happen to your company.
A credit application was received by one of my clients (we’ll call the client Best Equipment, Inc.) asking for a $150,000 line of credit to be established and had placed an order for some equipment that my client manufactures. The sales manager was naturally very happy about this and asked the credit manager (let’s call her Mrs. Jones) for a prompt approval. The equipment needed to be loaded on the truck that afternoon and delivered to the customer’s place of business. Mrs. Jones promptly pulled a credit report. The credit application stated that the location of the business was a wholly owned subsidiary of another company in another state. The application stated that accounts payable was handled by the parent company and that all invoicing needed to be sent to the parent company. For the sake of anonymity let’s call the company A-1 Fabricating. The subsidiary requesting the open line of credit was located in Pennsylvania while the parent company or main corporate location was in Arizona. The manager of the subsidiary we will call Fred Smith. Mrs. Jones being a seasoned professional credit person decided to look up the subsidiary in the Pennsylvania secretary of state on line business entity search. Sure enough, there was A-1 fabricating, LLC. The manager was listed as Fred Smith. So far so good. Mrs. Jones knew that the preponderance of the data would be on the corporate office in Arizona, especially since the subsidiary location in Pennsylvania was rather new and thus all the trade information would be on the corporate office in Arizona. Seems pretty logical thus far, right? Next, Mrs. Jones pulled a Dunn & Bradstreet Business information report on the parent company in Arizona. Wow, D&B gave a 5A 4!! This essentially means give this company whatever they ask for. They are simply great! Since the sales manager is hovering around Mrs. Jones desk, breathing down her neck and huffing and puffing. The sales manager says “well, are we good to go? I need to start loading the equipment on the truck”. Mrs. Jones is really feeling it. She thinks to herself, well I established that A-1 Fabricating has a location in Pennsylvania that matches the address on the application and that the parent company in Arizona has the best possible rating from Dunn & Bradstreet why not just stop now and set up the new customer, assign the needed line of credit and release the order. She thinks to herself, ”I’m not the sales prevention department, I’m a team player. I’ve got other things to do and I need to get this pushy sales manager off my back.” Her company customary practice is to extend 45 day terms. She informs the sales manager who is very happy and thinks to himself, “this is great! This new account could be a gold mine, good for monthly sales and the margins are super!”
Now let’s fast forward to sixty days later. The invoice is unpaid and is now fifteen days late. Mrs. Jones normally doesn’t get to alarmed until an invoice is 15 days late and so on day 60 she decides that she needs to make a call to accounts payable to make sure they have the invoice and if there are any issues with the invoice. She sees from her notes that the company has a 5A 4 rating and so it certainly isn’t that the customer doesn’t have the money, that it must been something else. So, she calls accounts payable and promptly gets the accounts payable manager (let’s call him Mr. B) on the phone. She says “hi, I’m Mrs. Jones the credit for Best Equipment and I noticed that your first invoice out of the gate has gone a little past due. Can you tell me what the status of the invoice is please?”. The Mr. B says “no problem what is the invoice number?”. She gives Mr. B the invoice number. A couple of minutes go by and she can hear on the other end of the line the Mr. B typing away. He comes back on the line and says “I’m sorry, I don’t see that invoice in our systems. Can you email me a copy please and I’ll get it entered right away”. They exchange some pleasantries and end the call. Mrs. Jones emails the invoices and asked the Mr. B in the email to call her back once the invoice has been set up to be paid with a payment date.
The next day the Mr. B calls our credit manager back. “Hi Mrs. Jones, I think you sent this invoice to the wrong customer. We don’t have a location in Pennsylvania ! Mrs. Jones calls the sales manager in a panic. “Get out to A-1 Fabrication asap! There’s something wrong. The accounts payable manager in Arizona said they don’t have a location in Pennsylvania and that they have no purchase orders naming us a vendor! Now the sales manager is in a panic since commissions are reversed when an account hits 120 days. He takes a ride to the ship to address. It’s in the middle of nowhere. He sees a barn off in the distance which is old and somewhat dilapidated. He drive down the dirt road to be greeted by two very large and menacing German shepherds! He doesn’t dare get out of the car in fear for his life. He was just about to leave when a hulking man with disheveled hair and dirty overalls approaches his car. “You’re on private property, what do you want the menacing man says”. I’m the sales manager for Best Equipment and I was here to see Fred Smith. “I’m Fred Smith, what do you want?” “I need to find out when we can expect payment on the equipment we sold you a couple of months ago”. Fred Smith says “oh yeah, I’m just waiting on a large payment from one of my customers and then I can pay you. He says, you want to come into my shop and I can show you around. The sales manager says sure, but I’m kind of nervous about your two dogs. Fred says, “ah they’re harmless, their bark is way worse than their bite” and proceeds to command the two dogs to go away. Inside the barn, Fred shows him his fabrication operation and a project he was working on. The barn is very dark and they are the only two inside. The sales manager inquired “where’s the equipment we sold you?” Fred says, they are at a couple of different job sites that we are working. The sales manager sensing something was wrong. This equipment is pretty large and not usually moved around from job to job but rather they are usually used in the shop. The sales manager says to Fred, “well, it was nice to meet you and appreciate your business, so again I need to let the credit folks know when we can expect payment?” Well, at this point Fred’s demeanor immediately changes for the worse, much worse. He glares at our hapless sales manager and says “I told you, I’ll pay when I get paid. You don’t want to make me angry little man!!” Fred is standing between our sales manager and the door and for a minute, he was not certain that he was going to get out of there with his skin intact. He does manage to slip by Fred and hustles out the door and to his car and speeds off, heart racing and sensing he just got out of there in the nick of time. Our shaken sales manager calls Mrs. Jones and relays what just happened.
Fast forward another week or so and the matter comes to my firm’s attention. Mrs. Jones wants to do an investigation into Fred Smith and what their options are. In summary, our investigation revealed that Fred was in his late forties and had spent one half of his adult life behind bars for crimes ranging from assault with a deadly weapon, fraud, receiving stolen goods. He even was convicted of fleeing a courthouse! That Fred was in the process of being evicted by the owner of the property he was working out of. We found out that he lived in a RV and had no tangible assets. Finally, we discovered that Fred had sold our client’s equipment on e-bay and that he was in the process of moving to North Carolina!
The moral of the story is that commercial identity theft is real but a simple phone call to the reputable A-1 Fabrication in Arizona would have stopped the fraud being perpetrated by Fred dead in its tracks.
Next time, I’m going to write about the importance of verifying purchase orders. Until then, trust but always verify!