Verify Purchase Orders! - A True Story of Due Diligence

So, your company was just awarded a large purchase order, hurray!

It’s a well established institutional account. In fact, it’s a local hospital. The hospital, let’s us call it ABC Regional Hospital. ABC Hospital has just placed an order for 15 defibrillators. The defibrillators that were ordered are the top of the line, state of the art machines used in hospitals. They wholesale at $20,000 and with a 30% gross profit margin that is a $90,000 gross profit margin sale!

The sales manager is ecstatic! The credit manager, let’s call her Mary is ecstatic as well. She thinks to herself “this is such a nice order and no hassle. ABC Regional Hospital has been an excellent customer for many years, No need to do a credit review on this one. I can get on with chasing these problematic mom and pop accounts that give her fits. “Refreshing that we get a big order and I don’t have to get stressed out about it”.

Mary loves working for Elite Medical, Inc. The ownership treats her well and the company is recognized as one of the best places to work in her state. Most of Mary’s customers are very reputable entities. Hospitals, clinics, state, federal and local governmental entities, research labs, etc. Her only issues come from small mom and pop ambulance companies, small medical equipment retail stores and nursing homes. Even with these businesses in her portfolio, her bad debt losses are pretty small compared to her sales. Upper management is happy with Mary’s performance and she feels like she is doing a very good job, which she is.

Her biggest challenge is making sure the invoices are sent to the correct person at her customer’s location and that the invoices always are accompanied by a proof of delivery. Resolving pricing disputes quickly and efficiently to make sure any adjustments that need to be made are done in a timely basis to keep the days sales outstanding number at an acceptable number. After all, the DSO is the most important number that a credit manager gets judged by. Pricing disputes are her biggest challenge “my salesperson said my price would be X and I’m being charged Y” is something she hears every day. The invoice will not get paid until the issue is resolved which will put a drag on the DSO.

So, the purchase order for 15 defibrillators comes into the sales office via email which is very normal for this account.

As mentioned, sales is very excited as the margins are great and the sale will be smooth. The credit department will have no objections and the order will be effortless with a nice commission.

The order is booked and the ship to address matches the physical address of the hospital. The delivery date is 7 days away, so the logistics of delivering the defibrillators will be easy.

Fast forward 4 days and the sales department gets an email from the purchasing person at the hospital requesting that the defibrillators be shipped to a customs broker at the local seaport which is only seven miles from the hospital.

The sales rep doesn’t think much about the change in delivery as he has hospitals in various third world countries that they help the local indigenous populations. The ship to address is changed. The credit manager isn’t aware of the ship to change as the change doesn’t effect the credit decision.

Fast forward another 3 days and the 15 defibrillators are delivered on time to the customs broker. As with all of her customers the terms are net 30 days. So, the defibrillators are delivered to customs and a bill of lading is generated which is brought into the office by the driver and the bill of lading is scanned into the system.

Mary’s department has a policy not to call on past due invoices until they are 5 days past due before they start calling the customers for payment status. Her rationale is “most of our customers are big institutional accounts that were hard fought by sales to get as a customer” and she doesn’t want to call any sooner as it might upset the customer and cause a brouhaha and she doesn’t need to get yelled at by sales for upsetting a customer when it can be avoided. In fact, there is an unwritten rule not to call any of their hospital accounts until they are 10 days slow.

Fast forward another 40 days. Mary comes into the office and pulls an aging report just like she does every morning to plan on what calls need to be made that day. She sees that ABC regional hospital in 10 days past due. She isn’t concerned as this isn’t the first time they are slow paying and it won’t be the last time either Mary thinks to herself. But none the less, she will give her good friend Carroll who is the accounts payable manager a call. “Hi Carroll it’s Mary at Elite Medical, how are you?” “Hey Mary, oh you know, living the dream!”. “What can I do you for?” Carroll asks Mary. Mary says, “I’ve got an invoice that is showing past due and I was hoping you could get me a quick status on payment”.

Carroll ask for the invoice number which Mary supplies.

Carroll asks for the purchase order as well. Carroll says let me look it up. It will take a minute to pull up. Mary says “no problem. What’s on your agenda for the upcoming weekend?” “Probably heading up to the lake”, Carroll replies.

Carroll says “I can’t find either the purchase order or the invoice number in the system. “What was the order for?” Carroll asks. “It was for 15 defibrillators”, says Mary. “Wow, that’s a big order!”, says Carroll. “Yes it is,” says Mary. Mary is now feeling a bit uneasy. “I’m sure there is nothing wrong with the invoice but this invoice is now going to age out and it could be brought to the attention of the CFO which is something that Mary never wants to happen. “Who was your sales rep on the order or do you have the name of the person that placed the order,” Carroll asks. Mary responds that the order was emailed to our sales department like most of the orders from the hospital. Carroll asks Mary to email her a copy of the invoice and she will begin investigating the invoice and promises Mary that she will get right on it and will call back no later than the end of the day. Carroll also asks Mary to email a copy of the purchase order to help expedite the request from Mary.

They end the call and Mary e-mails Carroll a copy of the invoice and purchase order per Carroll’s request.

Later in the afternoon Mary’s phone rings and it’s Carroll. “Hi Mary”, says Carroll. Carroll says “Mary, I’m having an issue trying to approve this invoice for payment. First of all, the purchase is signed by a person that I have no record of being employed by the hospital. Additionally, the issuing of a purchase order this large would have to have been signed by the hospital’s CFO and this clearly isn’t the CFO. Secondly, on orders this large, the purchase order would have had to have been physically picked up by your sales rep or at the very least the purchase order would have to have been delivered to your company certified registered mail.”

Mary is now in a panic. She can feel her blood pressure rising and she remembers that her doctor told her to try to avoid stressful situations as her blood pressure was way too high. Mary asks on the off chance “could have one of the doctors placed the order?” “No way”, says Carroll, “if a doctor did something like that that person would most likely get fired!” Carroll asks Mary if she can e-mail a proof of delivery. “Sure can”, says Mary, “I’ll email it to you as soon as we hang up. Thanks Carroll! Mary thinks to herself “what a great person Carroll is. Even though it appears that the invoice and purchase order number is incorrect, she is still willing to process for payment on a proof of delivery alone”. Mary calls down to shipping Hey guys, can you get me the signed POD for that big defibrillator order from 40 days ago?” “Sure, says the shipping manager. Once we’re done loading the truck, I’ll bring it up to you”.

A couple of hours later, Jim in shipping brings her a copy of the POD. “Here you go Mary”. “Thanks Jim!”.

Mary reviews the POD and almost immediately notices that the normal ship to address which is the hospital was different. The ship to address is a customs broker at the seaport. “No one ever told me that the ship to was changed! “OMG, what are we going to do?” Mary calls an emergency meeting with the sales manager and her CFO. They decide not to inform the president of the company until they have a change to look into what happened. No sense telling the president that we may have been taken for hundreds of thousands of dollars until they were more certain of what transpired and if there was a logical explanation. The sales manager said “Hey, the hospital is always purchasing medical equipment and donating it to impoverished countries that are in desperate need of modern medical equipment.”

The next morning, my firm receives a call from the CFO asking if we would look 1 into the matter and to determine if there was anything that could be done to recover either the defibrillators or the money.

A quick investigation into the customs broker revealed that the broker was in good standing, had no instances of any liens, suits, or judgments. No tax issues and they were not onthe OFAC list. (Worldwide Watch list) Corporate records showed a Peter Jacob as the owner of the customs brokerage firm. We developed a cell number for Mr. Jacob and placed the call.

Peter answered his cell. He said he did in fact remember the shipment. “Wait a minute and I’ll pull up the paperwork for the shipment” After a couple of minutes Peter comes back to the phone. “ Yep, Elite Medical, Inc. delivered 15 defibrillators to our facility. We cleared them through customs and they were loaded on a cargo vessel heading to a port in Nigeria.” We asked who was the person or entity that was supposed to pick up the defibrillators once they arrived in Nigeria?” According to his records, Peter said the recipient at the final destination was a local hospital in Nigeria. (In fact, it was someone fraudulently posing as a Nigerian hospital representative.)

We then called the President of ABC Hospital and asked if they had in fact purchased these defibrillators with the intent of donating them to this local hospital in Nigeria. The President of the hospital said, “While that would be a good and noble cause. We have no affiliation with any hospitals in Nigeria and that most of their charity work was done in the Sudan and the president went on to tell us how proud his hospital was for doing such great works.

As we suspected, the defibrillators were long gone and absolutely no way to recover them.

Unfortunately, the new arrival of unpaid for defibrillators would be quickly carted away and sold on the Black market.

It’s too bad. If someone had called the hospital to thank them for this large order, none of this would have happened. Later that day Mary, her sales manager, and the CFO had to tell the president of the company what had happened. The sales manager lost her annual bonus. The CFO was reprimanded.

Mary’s blood pressure rose to a dangerous level triggering many sick days off.

Corporate and institutional identity theft does exist and it is costly. Be alert and be ware!

Blog Post: https://www.corpintelsvs.com/verify-purchase-orders/