How closely are you examining potential credits, or tracking the risk level of existing ones? If you're part of the emerging looser-lending trend, you may not be looking closely enough.
There's evidence banks are entering a new lend-and-lose cycle that will hurt those that leap into loans before investigating them thoroughly.
Who can search behind the numbers to reveal the true risk of a credit?
Forensic accountants, better known to bankers for their evidentiary skills in bankruptcy court, are well equipped for a more proactive investigatory role.
Their analytical skills enable them to give early warning to bankers - to steer clear of potentially troublesome customers or bail out safely from current loans before they go sour.
Like detectives, forensic accountants look behind the numbers to see what customers may be hiding - or may not even realize. Shreds of evidence are made to tell the whole story.
These highly trained professionals go beyond simple tests to examine the reality, validity, and soundness of the numbers presented to them. They rely on a complex skills set that begins with a thorough understanding of the customer's business and industry and as well as the document flow within the business. They incorporate business judgment into their analysis of the customer's financial information.
Forensic accounting techniques range from methodically tracing funds and vouching accounting records to a total reconstruction of a company's books and records. Forensic accountants can do detailed analytical review, industry ratio analysis, and sensitivity analysis, and can utilize computer-augmented models to test alternative "what if" scenarios.
Unexamined numbers wreak havoc with banks' risk management. Take the apparel maker with $1 million in inventory. Can or will your internal auditors distinguish the stale styles and wrong season from the potential hot sellers?
What about a manufacturer with a $1 million in parts? A forensic accountant will determine whether those parts are needed in the company's current or projected production or are just obsolete or excess.
Because of downsizing, bank audit departments may find it hard to maintain this expertise in-house.
Take a chain of retail pharmacies heading for financial disaster. The chain's lender engaged our firm to determine whether the company's survival plan was feasible.
The bank needed to know how sick or healthy the company was - the trade had put it on cash-on-delivery status - and where it was likely to be in three months.
On paper the company's plan looked great. It called for a consolidation of warehouse space, a new buying program that would reduce inventory, and significant growth in sales.
The company's managers truly believed they could implement this plan, but we determined that it was unachievable.
Commitments to landlords would not preserve any cash in the short term. Past-due payables would grow during this period, rather than be paid down, and sales had never been as high as the company was predicting they magically would be.
With our conclusions and our help, the bank got out of the credit. We found a more aggressive lender willing to buy our client out. Our client received a check in the full amount of the credit.
When should you call a forensic accountant? There are three times in the life of a loan when their skill can make a difference to the bottom line:
*Before the loan commitment is signed on a multimillion dollar deal. (A forensic accountant's review wins the cost-benefit test.)
*When a loan shows signs of deterioration. (A forensic accountant called in early enough can save the entire loan, by determining the true financial information.)
*When the customer is heading for bankruptcy. (A forensic accountant doesn't just determine the cause; he or she can help maximize the bank's return by figuring out the optimal time to collect the collateral.)
Bankers throwing caution to the winds to win new customers may discover they're in a risky business indeed. It's time to reinstitute the cautious practices bankers relied upon in the wake of the commercial real estate collapse.
