BMC's Unpleasant $4.3mln Discovery Holds a Lesson for You: Trust, but Verify, AR's Work
You might think the differences between the giant public LBM dealers and a private independent are so vast that there's nothing a small company can learn from the big guys. But BMC Stock Holdings' latest report does carry such a lesson: Even your best accounts receivable people deserve the occasional audit, just to prove they are as good as their numbers indicate.
"During the second quarter, we determined that one of our local credit managers, who has since been terminated, violated the company's credit policy by manipulating certain open customer invoices to prevent them from aging properly," Jim Major, BMC's chief financial officer and treasurer, said during an Aug. 11 call to analysts.
"As a result, we did not pursue more vigilant collection activities in a timely manner, and these invoices, which still appeared to be within agreed terms, were not included in our provision for bad debts. We recorded $4.3 million of out-of-period bad debt expense in our second-quarter results."
That $4.3 million amounts to 0.001% of BMC's revenue in the 12-month period ending June 30 and dings its potential profits by less than 0.0036%. For a company the size of BMC, the writeoff makes no material difference for accounting purposes, it concluded. But that didn't make Major or his fellow executives feel any better.
"We've seen no evidence that this issue existed beyond the local operation and individual employee in question, and we do not expect this matter to have an impact on future periods," Major told the analysts. "Our management and our board take this matter very seriously. We will learn from it, and we are working diligently to remediate the underlying control weakness as quickly as possible.
"After more than 20 years with the company, I've not seen a situation quite like this one," Major continued. "It's extremely disappointing, and in no small part because it distracts from the tremendous results we delivered in the second quarter."
What can you do to avoid suffering the same fate? Try these:
* See if your ERP system bars people from changing a due date unless the change is approved by a superior.
* Think about the culture you have fostered in the credit department. Does it demand success ... or else? Does it promote the type of competition that would prompt someone to cheat in order to win a prize?
* Incentive rewards have value, particularly within cultures like the sales department. In AR, giving signs of appreciation that aren't tied to particular stats might be an alternative way to go.
* Before you single out someone for being the best, double-check to make sure they deserve it.
* Along with re-aging of debts, keep an eye out for credits being entered at the end of a month followed by an immediate re-billing of the same amount at the start of the next month. That tactic not only pushes out the bill payment, it makes your latest monthly report look better than it deserves.
* Set rules as to who can re-age an invoice. Limit the number of people with that authority.
* Above all, look regularly at the details that create your reports. If you don't check daily or weekly, then set up a regular audit trail.