Receiving internally generated statements from a client is bad enough, but cash basis statements may add additional problems, inaccuracies, and outright fraud.

I once worked with a commercial borrower who was providing the bank with cash basis statements. The statements showed that the company was basically breaking even, but this was far from reality. Because the statements were cash basis, the borrower was only recognizing expenses as they were actually paid. The reality was that a bunch of unpaid bills were accumulating. By the time we found out about them, it was too late. The company declared bankruptcy shortly thereafter.

How can you avoid such a problem? Require an audit. Check with the IRS to determine that all liabilities are paid up. Make sure that any defaults on other loans, leases, insurance policies, etc. trigger some communication with your bank.

Have you had a similar case? What did you do about it?

 

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