WHAT'S  IN A FINANCIAL STATEMENT.   

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What's in a financial statement?  When a company provides a copy of its financial statement to obtain credit, do not judge it favorably after a quick glance at the bottom line or the cash figure. Instead, look for indications that the financial statement may be questionable.

Randomly dated statements: Accountants' statements usually are prepared at the end of a month, quarter or year, not on May 17, or October 20, for example.

Inflated Assets: Assets that are impossible to confirm, such as marketable securities or real estate, may be suspect. Also, accounts receivable shown in rounded figures and/or in extremely high amounts are questionable. A large "due from officers" should be checked as well.

Who is the Accountant?: Look for the name of the outside firm that performed the audit. A CPA listed as the preparer should be checked with the appropriate state licensing board. If the business and the accountant are in different states, find out why.

Check carefully: In the case of a new business, the stated worth and starting capital figures to be sure they are consistent.

What you should do:

Ask for, and carefully check, a financial statement from a company before you grant a significant amount of credit or ship goods. Check assets to determine if they can be confirmed by other sources, or in the case of accounts receivable, that they are consistent in size with annual sales.

Check the credentials of the person who prepared the statement. Is the statement heavy on assets but indicates little debt? Does it look just too good to be true? It probably is. Call the company's primary bank for a reference - specifically the average balance. If the bank says, "low three figures" and the cash on the balance sheet is $560,000, something may be amiss.

THEFT OF  RESEARCH, TRADE SECRETS. 

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Intellectual property is an increasingly critical asset as a business is transformed through high technology and the information based economy.

What you should do:

SEEK A DISINTERESTED FIRM OR INDIVIDUAL - To audit your companies internal controls and individuals who evaluate these controls - Seek to update Management Control Methods; Internal Audit Functions, Personnel Policies and Procedures in regards to Federal and State Regulations.

BUSINESS THAT ARE PREFERRED BY FRAUDSTERS.

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While fraud can be found in almost any line of business, certain businesses have special appeal to dishonest business people. Here are the types of businesses and products chosen most frequently by swindlers:

Wholesale General Merchandise: Popular examples include house wares, health and beauty aids, electronic items such as radios, stereos, VCRs and TVs, computers, etc.

Relatively Small Items: Crooks prefer products that can be easily moved, difficult to trace and easy to sell.

Low-To-Medium Priced Apparel: Also a leading line for fraudulent businesses.

What you should do:

If you deal in any of the thousands of products preferred by dealers in fraud, you must protect yourself and your business by establishing, and following, tight credit procedures at all times. These procedures will include obtaining independent verification of information provided by companies requesting credit from you. You might join a trade group consisting of other businesses similar to yours, so that you can share and compare credit information.        

WHO REALLY OWNS THE COMPANY - THE REAL OWNER .  

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Who Really Owns The Company? Criminals in the business of fraud know that a careful business person will likely check on the ownership of a company and its principals before granting credit and shipping goods. They make it very hard for you to find out who you're doing business with. Here are some situations to watch out for:

Front Man - Very young owner or principal: The true ownership of the company by individuals with questionable backgrounds is often concealed by using a "front man". One of the con artist's favorite fronts is a very young person, because he will not have to invent a long business background.

Older, Retired Principal: Older individuals also make good "fronts" if they retired with clear business records and are willing to be used to confer respectability on a dishonest operation.

Hard-To-Confirm Employment Records: The business backgrounds of a company's management should be specific and easy for you to check. Be on guard if a principal claims long periods of time working in an obscure company in a foreign country, for several companies now out of business, or as a consultant, particularly if the principal will not provide references or specific business locations from that prior employment.

Possible Secret Sale of business with former owner being paid to stay on: The new owners may be skimming profits, selling the assets and running up credit while the old owner keeps you complacent. The swindler wants the fraud to look like a normal business failure because this makes it difficult for prosecutors, who must prove intent, to get a conviction.

Confusing, Complex Organizational Structure, especially in a relatively new business: Unscrupulous principals may hide behind a maze of complicated corporate or partnership entities (mostly false) so that you'll find it extremely difficult to check on the company.

What you should do:

Find out all you can about the principals with whom you contemplate doing business. Insist on the name and phone numbers of companies with whom the principals claim past employment so you can confirm their business background. Take a CLOSE look at those credit references!

References supplied by a fraudulent company may not be all they seem at first glance. To avoid being lulled into a state of complacency by a company with all the right references, re-examine those references with a more critical eye.

Be suspicious if a reference provided by the new customer gives an instant "glowing" account without taking time to consult records when you call.

Both trade and bank references can also be falsified by friends or partners of the fraudulent business person. Take care when you are provided with a specific extension from an individual and are told to "Ask for Joe."

Answering services can be used to provide a false confirmation or reference.

Beware of hard-to-trace fax numbers supplied as the only way to contact references: They may all lead to a single location where one individual can respond to reference checks using a variety of business names.

Check a reference company by confirming through outside sources, such as the Yellow Pages, that the company is truly an existing business.

Check to see if the company phone number you were given can be obtained from directory assistance. Be sure the individual you speak to actually works for the reference company and is in a position of authority. Ask to speak to the credit manager instead of the individual name provided. Be sure the reference is in a line of business that makes sense as a reference for the company seeking credit.

If provided with an 800 telephone number, ask your customer or the reference business for the local number -then call it and confirm the location.

FRAUD - THEFT UTILIZING SUCCESSFUL BUSINESS NAMES.

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Don't be too quick to think that you have heard of a company, and therefore it is legitimate. Fraudulent companies will sometimes try to convince you that they have been around for a long time by carefully crafting a company name to mislead you:

The "Familiar Name": The fraudulent company may use a name that is very similar to a successful, well respected company in the same town, or similar to a company with a national reputation, such as the "International Business Machinery Company."

The "Big Name": A fraudulent business may use an impressive, nondescript trade style which is intended to convey an impression of size and stature. Some of the favorite words used by these false companies are International, American, U.S., European, Atlantic and Pacific.
 

FOREIGN OWNERSHIP, CREDIT AND SHIPPING. 

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Difficult-to-confirm foreign ownership: Phony foreign companies are popular with securities dealers and merchandise swindlers.

What you should do:

Get specific information on claimed affiliates, including addresses and phone numbers.

Check the information by using a third-party: for instance, you can contact an individual at the business via a main telephone number to confirm the existence of affiliates and their relationship with the company requesting credit or merchandise from you. Contact the Secretary of State to check corporate charter information.

NEW DEALS, CUSTOMERS, HIGHER PROFITS. 

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The Unsolicited, New Customer. Were you just lucky?  If most of your orders are obtained through your sales people, pay special attention to the unsolicited order that "came in over the transom". Here are some "red flags" to watch for:

The customer avoids giving you hard information about his or her company. They may act excited but vague, emphasizing what a great opportunity this is for you.

The customer makes a case for "urgent" delivery. For instance, he needs the order before a trade show, or to fulfill orders for a promotion already underway. Brand-new customers pressing for immediate, emergency or rush shipments on credit may be high risks.

The unsolicited order is large. Be even more careful; you have more to lose! However, many fraudulent business people may start with small orders, which they pay for on time. Later, when their credit with you is "good", they'll place larger orders for which they do not intend to pay.

The new customer seems very familiar with your credit policy. This is suggested when the company orders just under the largest amount that would trigger a more stringent credit check.

What you should do:

DO NOT grant instant credit if you do not know the customer, ever though the customer's reason for the rush sounds plausible or she threatens to go elsewhere with the order. If the new customer offers credit references with other companies, be sure to check the size of the orders for which the credit was granted to see if they are consistent with the size of the order submitted to you.

Be weary of a sudden flurry of telephone calls for credit references on a company you just began selling to. It may be using you to set up credit with other companies it intends to defraud. If you are selling directly from a wholesale establishment and the customer wants to remove the merchandise immediately, insist on cash-and-carry.

Check Location, Location, Location - Because you may not visit your customer at their place of business, you must check to see that the address provided does not carry the earmarks of a fraudulent business.

Fraudulent businesses operations generally utilize short term, low rent locations. Typical business scams, not surprisingly, move around frequently.

Fraudulent businesses often prefer mail drops. Using a mail drop gives a phony business a street number mailing address instead of just a box number.

Strip "Mini-Warehouse" locations. These can give the bogus "wholesaler" the opportunity to move part of his stolen inventory at below cost to walk-in buyers.

Be sure the address is appropriate to the type of business.  Residential locations are unlikely for wholesale, retail or manufacturing lines of business.

THE POST OFFICE BOXES AND THE SHIP - TO - ADDRESS. 

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Is the Post Office Boxes or The Ship-To Address at a different location than the business address? You may be shipping goods to a temporary location from which it will soon disappear, as well the "offices" at the business address.

What you should do:

Ask how long the business has been in its present location, and then check with an outside source or the building's management to confirm that it is a street address and not a mail service location. Ask a supplier you know or other third party in the area to stop in or drive by the business for you. Ask the credit references provided by the business how long they have been selling to the business. This may tell you the length of time the company has been in business.

Beware of the mystery affiliates: Often a fraudulent company often wants to convince you that it is a large, expanding business with a lot of resources backing it up. It may claim to have parent companies or related businesses, branches and/or subsidiaries which do not exist. Here are some other things to look out for:

A claimed relationship to a well-known, legitimate company: Fraudulent business attempting to look legitimate sometimes represent themselves as subsidiaries or branches of existing legitimate companies.

UP FRONT ADVANCE FEE SCAMS. 

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A type of fraud where an up front payment is obtained for services to be rendered later, supposedly to "cover costs". This advance fee is accepted with no intention of providing the service. Example: The swindler, acting as a broker, is paid to secure a loan for a business. After some time, the swindler skips town or tells the victim that a suitable lender could not be found and refuses to return the fee.

MERCHANDISE HIT AND RUN FRAUD SCHEMES.

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A swindler moves into a location and orders merchandise COD, paying with phony certified or cashier's checks. By the time the counterfeit check bounces, the "skip artist" has moved on to a new location to repeat the scam.

FRAUDULENT REFERENCES, BANK LOANS. 

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Fake trade and bank references are used to obtain loans not intended to be repaid or to arrange financing for the leasing of stolen or non-existent equipment.

GOODS MERCHANDISE BUST OUT OR OVERBUYS.

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These terms describe criminal activity that aim to obtain large amounts of merchandise without paying for it. The swindler orders merchandise from a few suppliers and pays promptly. These suppliers are then used as credit references for larger and larger orders. The bogus company soon becomes a slow-payer and then a non-payer. You, and probably several other businesses, are stuck.

This type of fraud is often well planned, highly organized and involves substantial financial backing. Unpaid-for merchandise is sold below cost to other illegitimate businesses, at "flea-markets" or peddled door-to-door.

PHONY FINANCIAL ASSET AND THE TRANSFER OF STOCK. 

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A phony company exchanges its worthless stock for the stock of a sound company. The swindler then creates sham financial statements with inflated assets. These statements are used to get other businesses to swap stock for a piece of a bogus holding company. The assets of a legitimate company acquired in this way are then sold off or used as collateral on bank loans that are never paid.

THE HOMETOWN REPEATER TRADE SCAMS.

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By using different trade styles, keeping their operations small, and limiting their victims to "out of towners," a "respectable citizen" swindler may indefinitely avoid criminal prosecution.