Field Exams Sample a Handful of Invoices. The Fraud Is in the Rest of the Book.

A field exam is one of the oldest controls in asset-based lending, and one of the most trusted. An examiner visits the borrower, tests the receivables ledger, reconciles it to the books and samples a set of invoices for verification. The report goes to the credit committee and the borrowing base stands.

The trouble is the word "samples." A field exam tests a small share of the book, a few times a year. A borrower who wants to inflate the borrowing base does not need to fool the sample. He needs only to keep the bad invoices out of it.

Why sampling is the weak point

Sampling is a cost decision, not a fraud-control design. As the International Factoring Association's magazine puts it, it is not economical to verify every invoice, so lenders choose a proportion by value and payment terms. That is sensible for catching errors. It is weaker against someone who knows how the sample is drawn, and weakest against fraud that lives outside the ledger altogether: the same receivables pledged to a second lender, or invoices for shipments that never happened.

Those are exactly the mechanisms alleged in the two largest recent cases. Federal prosecutors allege that First Brands executives inflated invoices and double- and triple-pledged collateral. In Tricolor, the Justice Department alleges roughly 2.2 billion dollars of pledged collateral against about 1.4 billion dollars that was real, and the SEC has since brought its own civil charges over double pledging. These are allegations, not findings. One recurring observation in commentary on the cases, for example in this explainer on double pledging, is that each lender looked only at its own facility. Nobody looked across them.

What the whole book can tell you that a sample cannot

Checking every invoice by phone is impractical. Checking every invoice against data you already have, or can obtain cheaply, is not. Three sources do most of the work:

• Lien filings. UCC searches show who else claims the same collateral, and when they filed.
• Trade records. For goods that move, shipping and delivery records show whether the shipment behind an invoice plausibly happened, and when.
• Your own bank statements. Collections tell you which debtors actually pay, how long they take, and whether payments arrive from the debtor or from somewhere else.

Run against the entire receivables schedule, these turn a sample into a census. They do not prove fraud. They tell you which invoices and which debtors deserve a human verification call, and that is a far better use of the examiner's time than a random draw.

Eight tests you can run on your own book

1. Lien recency. When did you last search UCC filings on each borrower? Any filing after your own, covering receivables or inventory, needs an explanation from the borrower in writing.
2. Debtor collections coverage. For each debtor on the schedule, did you receive at least one payment from that debtor in the last two cycles? Debtors that appear on the schedule but never pay you are the first place to look.
3. Who paid. Match incoming payments to payer names. Payments on assigned invoices that come from the borrower, not the debtor, can mean the borrower is covering for invoices the debtor never owed.
4. Ageing that does not age. Invoices that are rebilled, reissued or quietly replaced by new ones of similar size can hide receivables that will never be collected.
5. Concentration drift. A new debtor that grows quickly to a large share of the base, with little payment history, is worth a direct confirmation.
6. Shipment plausibility. Where goods move, sample the largest invoices against independent shipping or delivery evidence, not documents supplied by the borrower.
7. Round numbers and duplicates. Look for repeated amounts, sequential invoice numbers to unrelated debtors, and identical line items across months.
8. Exam coverage. What share of the borrowing base, by value, did your last field exam actually verify with debtors? Write the number down. Most committees have never seen it.

How Riskernel runs this as a fixed-scope assessment

The Collateral Book Exam is a first exam of every invoice behind a loan book, checked against lien filings, trade records and your bank statements. You get a signed flags report written for the credit committee: which invoices and debtors were flagged, on what evidence, and what to verify next. If you want it to, it can continue monthly so the book is tested between field exams rather than only at them. Scope and fees are agreed on a short call.

It is designed to sit alongside your field examiner, not to replace them. The examiner gets a ranked list instead of a random draw.