In my first month as a general manager for a large, publicly held distribution company, I was greeted one morning by two federal law enforcement officials in my reception area. They were there to investigate the alleged forgery of a federal purchase order submitted by one of my industrious major account managers (a sales rep to large entities) that caused hundreds of unwanted copiers to be delivered to a federal installation.

After a brief, sweaty phone conversation with my general counsel, who advised "being as helpful as possible," we went on to investigate the matter.

Here is what we found. Indeed, my sales person had creatively signed the purchase order, which he had hoped to quash before delivery. He had bad timing. In fact, he submitted the fake order to win a sales trip to Acapulco, an event that occurred during the tenure of the previous general manager. When I fired the sales person, he went right back to his desk and started working in a fit of denial. I had to call security to escort him out of the building, and all the while he beseeched me to stop being unfair to him.

How many legal and accounting matters do you sniff in this true-life story? How many instances of sales and marketing fraud were reported in today's news? How many lawyers or accountants ever set foot in the sales and marketing departments of their clients before they are asked to respond to a problem? With all the hoopla about financial fraud in the media, it is interesting to note two facts:

(1) As all of us ex-sales people know, revenue production, meaning sales, is the seat of fraud, not the accountants, they just record it. Finagling the numbers is not just the province of the lowly sales rep, either. Executives get involved here, too, in creating deals with alliance partners, distributors, and joint venturees.

(2) If you want to really know about the ethics of the sales and marketing department, join a sales rep on a sales day in the field. Then follow it up with a trip to order processing and check out what internal controls exist to root out sales fraud. Finally, go to purchasing and inspect whether they have vendor management protocols to protect the firm from being a victim of sales and marketing fraud. Consider canceling your golf vacation. You will be too busy.

Whether your business clients are professional practitioners selling advice, or commercial companies selling services and widgets, you can be of immense help and pick up new matters if you pay attention to the origins of sales and marketing fraud. And, because the economy is uncertain, companies of all sizes and types pressure sales to "make their numbers." As one pundit commented, "Sales and marketing fraud, whether as victim or perpetrator, is the largest financial risk a company faces."

Lawyers and accountants typically view the business clients as a set of legal or accounting matters: employment law, auditing, tax, etc. They should view the client as a list of business operations - sales, marketing, purchasing, business development - out of which problems spring for business development purposes as well as for professional liability purposes.

On the sales side alone, consider the business operations and structures that may be hot spots for fraud. This is not an exhaustive list:

(1) The sales department: companies may have direct employees or non-employees, such as manufacturers reps; they may sell over the phone and over the Internet; they may sell to other businesses, consumers, or members of their sales channel, such as dealers and distributors and franchisees and alliance partners. All of these channel members (perhaps with the exception of direct employees) should have contracts spelling out their rights and responsibilities, but an advisor should be aware that these contracts may be varied over time by special circumstances that are not documented.

One large equipment manufacturer was reported to have shipped a ton of demo equipment to a distributor for their sales efforts, but later refused to take the equipment back, claiming the distributor owed money for it. If the sales department sells to distributors and other third parties, they may treat larger distributors or entities differently than smaller ones. It is important to monitor this process, particularly in multi-state sales so as not to end up in federal court. The whole area of vendor support, from financing to marketing program financial support is fraught with legalities that sales departments are usually not aware of. Finally, if your client has a national or international accounts sales force separate from the locals, local sales reps get orders kicked in to their territories by those mega deals. While it is soothing to rebook these freebies as a local order, it is also not kosher. "Double booking" made the news a few weeks ago.

(2) Order processing or Administrative Operations: booking orders and returns is easy, finding out if they are forged or flaky is harder. In addition to forged documents, what else occurs here? Booking leases that may "float" through the end of the month's financial close and be reported as sales, which are later quashed; long term leases may also be booked for the entire amount of the lease's value up front; or, the lease documents accompanied by a purchase order, may vary or add terms that are unacceptable or unknown to the leasing company, such as the vendor's promise to replace defective equipment, or provide service within a narrow time frame.

Sometimes, companies bundle product and services and sometimes supplies into the same lease or purchase documents, a source of trouble since services and supplies are not immediate purchases. If your client does not scrutinize and check out the validity of each order, and that may mean calling the signer, and does not have a manager oversee bookings, they may end up having to restate financial reports. As we know, this is not fun.

(3) Marketing: the department that originates product and service packages also builds representations into those offerings, and these may on their face be beyond the ability of the company to provide. Or, sales or customer service representatives may vary those representations in creative ways. Although counsel oversees most marketing departments, there are abundant ways for representations to go awry in the field.

For example, out of my own history once again: sales reps were motivated by marketing to retrofit an allegedly wonderful new printing system into existing copiers in the field and healthy commissions were paid for this "sale." But, most of us knew that the printing system, while yielding great print results, also triggered numerous equipment failures.

When these retrofits were sold and installed, many reps also included numerous service representations - replace the gear if it failed too much, etc. - all of which added to and varied the original documents of sale or lease. This typical tale only proves how much fun marketing can make for general counsels.

(4) Purchasing: in the same way that companies perpetrate fraud, they may also be victims via their vendors. Billing may be flawed, products may be sold over the phone or Internet that no one ever approves at the right levels. A good vendor management program will scrutinize the billing, terms and representations of major vendors at least twice a year. Never forget that vendors have to "make their numbers" also.

What should you help your clients scrutinize? Their pricing may rest on old numbers and they may be due greater discounts for increased volume. Or, the vendor may be overpriced compared to competitors, and using competitive bids as evidence, may provoke lowered pricing levels.

Then again, your client may truly be the victim of some fraud wherein the vendor varies the billing and pricing just enough not to be noticed, but it may include features and services that were never proffered or accepted.

Vendors, just like sellers, make representations they hope a buyer will never call upon. Many vendors provide "training" in their original proposal; when you ask for training, if enough time has elapsed, they may wish to bill your client for it. Is it fraud or just fuzzy selling? The whole area of these "value adds" is tricky terrain for both sellers and buyers.

Most companies invite general counsel to their annual sales meeting for a lecture about what can and cannot be done with impunity in the field. They exit, ceremoniously, after fielding a few oblique questions, and are forgotten for the duration while the inmates run the prison.

As I have outlined, there is so much turf to cover in sales and marketing, you should, as outside counsel or accountant, intervene for most of the reasons listed, and for others, as well. As firms face difficult revenue forecasts, they may also contemplate structural changes: mergers, acquisitions, spin offs, layoffs. All of these provoke increased pressure to make financial goals. One client of ours that was doing collections work, noted that every time the company was about to lay off sales personnel or hire new sales recruits, receivables increased dramatically. Reason: sales people larded their commission checks by submitting bogus orders because they were paid commissions before the goods were delivered. A trip to the human resources department and the VP of Sales uncovered this fact and got the law firm lots of work, not just collections.

Your increased awareness as a professional of the business operations of your clients, and your proactive intervention with training and consultative hours on a host of topics will recession proof your practice. Sales and marketing fraud does escalate in uncertain times, but it is a constant fact of life, one that many professionals never see until it matures into an emergency phone call from a very stressed client. Remind yourself that it may not be Acapulco, per se, but the Acapulco mindset is alive and well in firms that sell and buy. Oh, by the way, a few months after my morning visit with the feds, it came to light that equipment that was "damaged" in shipment was being written off and re-sold by another creative minded employee. Good hunting!

© Copyright 2002, The Success Group

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