Sometimes fraud isn’t uncovered because of sophisticated software or a forensic accounting investigation.
Sometimes it begins with a simple thought. “Something about this just doesn’t make sense.”
That’s exactly what one newly hired credit manager kept thinking every time certain customer orders landed on her desk.
Within eight months, those nagging questions would expose a fraud scheme that had quietly operated for years and ultimately resulted in a few employees being terminated and criminally charged.
Here’s the story as it was told to me.
The credit manager had recently joined a manufacturing company with approximately fifty employees. Although she technically reported to the accounting manager, she quickly discovered that the company’s long-time general sales manager frequently made the final decisions, even on credit matters.
As she became familiar with the company’s credit procedures, she noticed that certain customer orders repeatedly bypassed the normal approval process. At first, she assumed they were isolated exceptions. But before long, realized they were part of a troubling pattern.
Following company policy, she returned these orders to the sales representatives for clarification.
Yet within hours, or sometimes the next day, the orders came back with instructions from the general sales manager directing her to approve them anyway.
Although she discussed these overrides with the accounting manager, she was told the general sales manager’s decision was final.
At first, she assumed these were isolated situations. However, she soon learned they weren’t. In fact, over the next several months she noticed the same pattern occurring repeatedly. The more it happened, the stronger her intuition became.
Something simply didn’t feel right.
Rather than dismiss that feeling, she decided to investigate.
One evening after everyone had gone home, she stayed late and began reviewing every overridden credit decision she could find.
What she discovered was a series of clues that became increasingly difficult to ignore.
Clue #1: The Same Customers Kept Appearing
Nearly every overridden order involved just five customers located within approximately one hundred miles of the company. Considering the business sold products nationwide, it seemed remarkably unusual that the exceptions all involved a small group of local customers.
Clue #2: The Credit Files Were Incomplete
As she examined the past customer files more closely, she found something else.
Important documentation was missing.
- Credit reports
- Trade references
- Supporting information for the original credit applications
Documents that should have been there simply weren’t.
Clue #3: The Pricing Didn’t Make Sense
Reviewing several years of invoices revealed another unusual pattern. These five customers consistently purchased products at prices approximately 25 to 30 percent below what comparable customers were paying.
Yet despite receiving significant discounts, they always paid on time. As a result, they never appeared on the company’s aging reports and never attracted the attention of the employee responsible for collections.
Clue #4: The Companies Didn’t Exist
Growing increasingly suspicious, the credit manager searched the Secretary of State’s online business registration records. Of the five companies, four were nowhere to be found.
Clue #5: Google Maps Raised Even More Questions
She then entered each address into Google Maps. Instead of office buildings or industrial facilities, the addresses led to residential neighborhoods. Three were single-family homes and two were small apartment buildings.
The customer names sounded generic but legitimate, names such as “ABC Electric,” and even included suite numbers to create the appearance of commercial businesses. But the locations told a very different story.
Clue #6: An Interesting Social Media Connection
One final discovery tied everything together. Searching Facebook, she found representatives from three of the five customers. Each was connected as a friend to either the general sales manager or the district sales manager.
By this point, the pieces of the puzzle had begun fitting together.
She concluded that the so-called customers were likely fictitious businesses or individuals posing as legitimate companies. Products were apparently being sold to them at deeply discounted prices and then resold elsewhere for profit.
Taking Immediate Action
Armed with her documentation, she approached the company’s president.
The president, a kind gentleman in his early eighties who had founded the company nearly fifty years earlier, had gradually stepped away from the day-to-day operation and placed considerable trust in his long-time general sales manager.
After carefully reviewing the evidence, the president immediately contacted the company’s attorney. Within twenty-four hours, the general sales manager, the district sales manager, and the accounting manager were no longer employed by the company.
Shortly thereafter, criminal indictments for fraud and embezzlement followed.
As I listened to the credit manager recount her experience, I asked what she believed had allowed the fraud to continue for so many years. Her answer was both simple and insightful.
There had been a complete breakdown of internal controls. A respected, long-time employee had created an environment where his decisions were no longer questioned.
As the company’s founder gradually withdrew from daily operations, oversight diminished. In addition, previous employees had become accustomed to approving exceptions rather than challenging them.
It wasn’t sophisticated fraud that allowed the scheme to continue. It was the absence of healthy skepticism.
The president later promoted the credit manager to controller and entrusted her with strengthening the company’s internal controls to help ensure that a similar situation could never happen again.
The Lesson
Fraud rarely announces itself. More often, it hides behind trusted employees, routine transactions, and explanations that no one thinks to question.
The credit manager who uncovered this scheme didn’t possess extraordinary investigative skills. She simply refused to ignore the questions that others had stopped asking.
Today’s organizations invest heavily in fraud detection software, data analytics, and artificial intelligence. Those tools certainly have an important role to play.
But one of the most effective fraud prevention tools still sits behind a desk, reviews unusual transactions, and has the confidence to ask one simple question:
“Does this really make sense?”
Sometimes, that single question is all it takes to uncover a fraud scheme hiding in plain sight.
Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
Nancy Seiverd, President
CMI Credit Mediators, Inc.
All Rights Reserved
Image by freepik.com
