Key points
- Basic supplier reviews can save businesses from significant financial losses
- ESG regulatory reforms coming in January 2025 make supplier compliance necessary
- Financial experts can add an insolvency lens to supplier verification
There is little that can prepare a business owner to discover they have been the victim of a fraudulent ’supplier’ who has ripped them off to the tune of $3 million.
The revelation that the fraud could have been prevented with basic background checks made the situation even more bitter.
Verify who you are doing business with
The case, recently investigated by Pitcher Partners as Bankruptcy Trustee, revealed a disturbing pattern after the fraudster declared themselves bankrupt prior to joining the business in a relatively senior role.
As part of the investigation, the Trustee identified fraudulent payments totalling over $3 million had been paid to the bankrupt person from his employer over a period of some 28 months.
The investigations revealed that the employee had been submitting false supplier invoices to his employer to fraudulently obtain the millions of dollars and that the amounts kept increasing as the fraudster became more confident over time.
Yet the real gut punch came with the revelation that this wasn’t a first offence – the bankrupt person had been made a bankrupt by their previous employer in relation to a judgement debt in the hundreds of thousand dollars for a similar scam.
The situation highlights a critical but often overlooked aspect of business operations: knowing who you’re doing business with. While trust is fundamental in business relationships, verification is essential.
Counterparty credit risk reviews
What many business owners don’t realise is that basic supplier screening – or what financial experts call counterparty credit risk reviews – can prevent such disasters.
These reviews will include any adverse finding, court actions and bankruptcy proceedings by former employees, which are all obvious red flags when assessing a new supplier or new employee with a checkered past.
No matter how big or small your business, it is prudent risk management to conduct an initial financial assessment of suppliers and continue to monitor them throughout the partnership with the business.
A counterparty credit risk review can identify financial risks early, ensures compliance with regulatory standards and minimises any potential supply chain disruption.
In short, it can help foresee potential problems and save a business from significant losses.
It can also work for government departments and other organisations in reviewing responses to grant applications, or a Request for Tender or Quote, by running a defined evaluation process across the applicant list, and shortlisting and making recommendations.
Mandated sustainability reporting – suppliers in the crosshairs
While a fraudulent and criminal financial behaviour lens is undoubtedly useful for these reviews, it can be adapted as necessary for other applications such as assessing compliance.
Indeed, it is a service that will almost become a necessity for big business next year when new ESG regulatory reforms come into force, ensuring comprehensive compliance with evolving standards.
The Federal Government is mandating sustainability reporting in Australia, with the new legislation active from 1 January 2025 starting with very large entities to provide investors and stakeholders with transparency around climate-related exposures.
Any business working with one of the organisations that must comply with the new standards will have to review their governance structure and demonstrate compliance.
Counterparty reviews may help spread risk across different supply partners to avoid overreliance, and support businesses in understanding key contract clauses, such as force majeure and material adverse change, which are crucial for exiting contracts if unforeseen events arise.
Financial experts – identifying all the red flags
Businesses can certainly handle these reviews in-house if they choose and perform their own Know Your Customer checks and review the Personal Property Securities Register.
But bringing in an accountancy firm allows you to leverage from their knowledge and skills and shifts the burden of risk to a third party. Financial experts can add an insolvency lens to the review to identify red flags more easily, and with their working knowledge of financial analysis it can prove a more valuable use of time.
In today’s business environment, trust must be earned through verification. Whether you handle it in-house or seek external expertise, supplier screening isn’t just an optional extra – it’s essential risk management that can save your business from becoming another cautionary tale.
