Frauds are, let’s face it, less likely to be discovered when there is lots of money flowing around the financial system, as it is simpler to move things around and ensure that tracks are covered. Bernie Madoff appears to have been a major exponent of this.
Now that the tide of money has gone out, you can see who has been swimming without trunks on. But companies are becoming increasingly creative in the ways they can increase their cashflow as they struggle to make ends meet and even now that is not always apparent. One of the reasons? Because ‘fresh-air invoicing’ is becoming endemic in the UK.
-
In some respects, the invoice finance markets have become victims of their own success. Higher competition pre-2008 had not only driven down costs, it has also prompted the financiers to work harder to make their offering more appealing in other ways. Companies can now enjoy 24-hour access to paperless facilities with direct integration, allowing them to upload data straight from SAGE and other accounting packages.
All of this electronic communication is a boon for everyone involved. Time is saved and fewer questions have to be asked to complete a transaction, and providing the invoices continue to be paid within good time, the process works well for everyone involved. The company retains its cashflow, the invoice financers get their cut and customers get their goods on time. It is an effective way to grease the business wheels.
However, the downside of this move towards such a slick system is that there is also more potential for fraud to be committed, as invoices can be issued for goods that are yet to be delivered – if they ever are – as firms try to find different, and in this case illegal, ways to make ends meet.
-
Part of the problem has been the increasing reluctance of buyers to pay for their goods and services within the usual timeframe. The credit crunch has impacted across the board, so much so that most companies are trying to extend payment terms. Those who would previously cough up within 30 days are now asking for 60 or even 90 day payment terms, which is going to immediately reduce cashflow.
With limited, if any, human contact needed to get the invoices financed, the temptation has been high to use this as a means of increasing the amount of cash a business has.
It is usually a gradual process, where perhaps initially an invoice is issued to the finance house on the Friday, for example, when the goods will actually be sent out on the Monday. This is still fraudulent, but may be seen by the perpetrator as more of a ‘white lie’ since the goods will be sent out shortly afterwards.
Then, as things progress, the timeframe between getting the invoice financed and the goods or services being delivered may get wider, until it is only a step away from creating fake invoices to be financed for goods and services which will never materialise. That, frankly, is the point of no return.
Dishonest companies cover up these false invoices by sending notes to the discount company claiming the invoice was issued wrongly and refunding the discounter. But the refund will often be paid for by money raised from new false invoices and so the downward spiral starts.
-
The scale of this problem has been emphasised by one City lawyer, who said: “There have been cases where the fresh-air invoices amount to half of the invoices being submitted to the discount company.”
Forensic accountants will uncover the depth of the scam very quickly when they start to look into the business ledger to try to find paperwork that backs up these invoices and it is not there. There has been a significant increase in the number of cases where this is happening – desperate times are clearly leading to desperate measures.
The best way to stop this happening is for the banks and specialist discounters to increase the number of audits and random inspections they are undertaking, to ensure they are not being hoodwinked by companies into paying out on fresh-air invoices. After all, their bottom lines are going to be squeezed by the credit crunch as much as anyone else’s.