The Lance Armstrong Story and How it Relates to Borrower Fraud

For those of you that have been through a fraud (frauds), the characteristics of Lance Armstrong are parallel to some of the fraudulent characters that I have met, sent to jail and had the opportunity to meet over the years. Let’s take a look at some of these human characteristics and perhaps reflect on a good Armstrong too.

Definition of Fraud:

The Intentional misrepresentation of the facts with the intent of getting a person or organization to do what they would not do if they knew the facts.

There is a hidden component that might be there at the start of your lending contract, but it can also happen after the loan is made so as to improve the appearance of collateral, financial conditions and overall operations. Some might say “smoke and mirrors” and others would say a “house of cards being built,” but the truth is hidden at some point and there is usually a financial component of gain when loans are involved.

They will Beat You Up – Lance Strong-Arm:

The borrower will come after you for questioning them.  They might “beat you up:”

“You don’t trust me, even after everything that I just told you.”

“You better be careful what you say to me, I don’t like your attitude or line of questioning.”

“Did you just start auditing? I explained this to the last auditor that was here.”

“Who’s your boss, I want to call them right now!”

“Our lawyers are salivating over this because you’re wrong and once you stop funding us it is not going to be pretty.”

It looks like Lance is no different than so many Borrowers that I have met in the past 27+ years. What’s going on? It is a defense mechanism to react to you getting close to the truth. You must be onto something, they are trying to strong-arm you and push you away. Will you have the stomach to stay or will you back off?

Type-A?  Competitive?  Win at All costs?

Some people are born competitors and some are keenly competitive or even predatory in nature. I think we all know people like that, but what is the motivation behind the lies, the deception, the “at all costs” attitude that create fraud. This is just some of it, but consider things like:

  • The Responsibility to Open the Doors – The owner has employees that have cars, houses, kids in college. The responsibility to open the doors is huge and can weigh heavily on the owner to “make it work.”
  • The Lifestyle – Back in the 80’s a young man named William (Bill) Stoecker (Graybill Corporation) borrowed money to live a wild lifestyle that included huge homes with artwork and lots of toys to impress the Lenders. It was all a pyramid of loans and it came crashing down on him, the 10th largest accounting firm in the USA and the lenders. See the story here: 60 Minutes – The Whiz Kid.
  • The Shame to The Family – Just look at Bernie Madoff. He lived large and he had quite a bit of notoriety before infamy. He lost family members over his Ponzi scheme.
  • I Built it Dam It! – This is what I call the “trophy.” If you have ever won a trophy for best of show or for sports or competition, it is a prize that ONLY YOU appreciate. Companies become the prize and that ownership is more than a name, bricks and mortar and employees, it is untold hard work, luck and personal sacrifice followed by personal pride. That pride can be like a poison in a worse-case scenario.
  • I Just Need to get Ahead for a While – This is the order that saves the day, the customer that comes from nowhere to make it all right again. The fake customer or the pre-billed customer that gives them just enough availability in the Borrowing Base to make it work until the real order arrives or ships. But they stay behind, other emergencies consume the cash and they need to repeat the lie longer. This of course leads to more lies, more willful misconduct and ultimately more fraudulent representations of the collateral.

Armstrong’s take on the above?
– His responsibility to the sponsors and his team;
– He made millions and owns properties in places like Colorado and Spain
– His own reputation and his 5 children now face public reaction
– He won 7 Tour De France victories by building upon his deception and name (that also let him pick some of the best riders in the world to help his team)
– He doped to “level the playing field” because all the top riders were doing it too.

The Two Sides to Armstrong and the Borrower:

Armstrong did good, a lot of good. His cancer awareness program has no doubt helped save many-many lives. His winning attitude and words were sincere. His hard work was real. Companies have mission statements, a purpose and in many ways they enrich the lives of the workers (houses, cars, college tuition, vacations, Etc.). A typical entrepreneur has a purpose and they contribute something to the world.

But survival instincts can outweigh moral beliefs and the need to survive can include the need to lie and fabricate. Those comments noted above like “Who’s your boss, I want to call them right now!” are part of that “other side” where barking like a dog scares away the timid while seeking to preserve the lies a while longer, fighting to survive, to perpetuate the lie for another day. Sure some good is done along the way, but some get hurt too.

Who Really Gets Hurt?:

I remember a borrower saying that “It was in the bank’s best interest that we did this.” I can see that paying payroll and not shutting down over a minor shortfall of cash would seem to be justified, but why not go to the lender and plead the case to create a structured over-advance?

Armstrong made millions in prize money and endorsements. Those companies got good advertising while selling quality products. Armstrong used very good gear and endorsed good companies. But Armstrong trashed the reputation of anyone that challenged his “dope free” stance and that personal defamation of character is not only mean, it is a horrible thing to do to a person’s reputation. While Floyd Landis (Won the Tour De France but was disqualified for using synthetic Testosterone) ruined his own reputation, his suite against Armstrong is also a bit insane when you consider that he has already ruined his own reputation. But others were just trying to bear witness to the rule violations and they had their personal reputations ruined.

Banks do sometimes get sued for lender liability and they often get dragged through the mud in scandals (look at the European Libor scandal that just happened, those lenders did it to themselves).  But lender liability can be managed with proper notification and written documentation that is signed (typically a “forbearance agreement”).

Consumers, corporations, endowments, unions, mutual funds, pensions and more will end up paying the bill from higher fees and other revenue enhancements needed to revive earnings after fraud losses. A write-off of just $1.00 of equity in a bank earning 2% will cause a need to book $50.00 of new earning investments.  That’s why fees are an asset-free way of replacing losses. But we pay those higher fees.

A Tale of Four Armstrongs:

Before concluding this Blog, I want to talk about four Armstrongs and only one is now infamous.

The Good Lance Armstrong – The Livestrong cancer charity organization saves and will continue to save lives. It fits Lance’s personality to get the message out loud and proud. Lance ran Livestrong and raised over $500 million dollars during his tenure. That leadership may help him to run another successful and well-motivated company in the future. Would you lend to a fraudster? Some will.

The Bad Lance Armstrong – He doped, he broke the rules, he lied about it and he ruined people’s lives over it. I know a few borrowers that have done most of that too, but not to the level of character assassination that Lance has done.

Neil Armstrong – The Astronaut – Talk about wild luck, Buzz Aldrin was the Commander of Apollo 11 and should have been the first to walk on the moon, but they designed the capsule with the hatch on the wrong side (one story).  Another version of the story says that they needed a humble man to fill the shoes of a legend in the making and the hatch was placed on Neil’s side on purpose. Thus Neil Armstrong became the first man to walk on the moon.  A legend-hero status that this engineer-aviator did not want, but he because the voice and face of that era.

Neil Armstrong – The Man – He passed away in August of 2012, but he lived a quiet life, rather than that of a man on the talking circuit or even the legend from 1969. He went on to teach at the Department of Aerospace Engineering at the University of Cincinnati and “Professor” was a title that he could accept. He was extremely quiet about his personal life and it has been said that after uttering “One small step for man..” that there really wasn’t much more to say. He was often described as “a reluctant hero.” He was one of mine.

Conclusion to This Behavior:

How do you want to be known? How would you like to be remembered? Why? Those are easy questions, but look what infamy will do to the answers. My advice to any borrower that is in trouble is that you need to go to the lender and plead your case. We’re not gods or rock stars, but we want to help people realize their dreams and we can often help you find the right way to make that happen and furher build your business into a legend. ABLTrain Icon


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Have You Hugged Your Receivable Aging Lately?

Receivable Ledgers BBC

Borrowers put all sorts of things in their agings. Overpayments, invoices, finance charges, debit memos, adjustments, freight adjustments, tax adjustments, Etc.  All of that works great, it sits there and it looks to be a mess at times, but at least it is all there. But are the offsets all there?

Like a Teenager:

If you have ever tried to raise a teenager, they find the sneakiest ways to get that phone or MP3 player while they are supposed to be sleeping or they sneak cookies into their rooms. I think that Borrowers sometimes behave that way too. We Asset Based Lenders do some due diligence like audits and we have reporting requirements too.  Borrower can observe the systematic flaws in our work a learn to avoid some of our behavior in the future.  They can sneak those ineligible adjustment items out of the aging.

My favorite is probably unapplied cash (that includes overpayments). These items should reduce the AR balance. Some of the credits are over 90 and some are under 90 on your Borrowing Base Certificate (BBC).  But they reduce the collateral and maybe the Borrower sees that as “bad” for the BBC collateral amounts?

Sooooooooo, they might reclassify these items into an “Accrued Liability” account labeled as “Accrued Deposits” or maybe they call it something similar or obtuse like “Deferred Revenues.”  But now it’s not in the aging. Is that bad?

Where Did The Offsets Go?:

The teenager (OK Borrower) took them from the aging and reclassified these things to some accrued liability account.  “They were there a minute ago, I saw them in the aging last month.”  Hmmmmmm?

Accounting Mumbo-Jumbo:

There are some accounting principles to consider here, but only one rings true:

The All Inclusive Principle – This was related to income and that it was better to include all income items on the financials. Taken to receivables, then all of the adjustments to revenues would also hit receivables (credit revenues and debit receivables to book the sale, do the opposite for reversals). This idea is a stretch to apply to receivables, but it has a little bit of merit to at least think about.

Liabilities – They are owed and can be booked when incurred.  We have an overpayment or a deposit, so that must be a liability to perform a future service or deliver a product in the future right?  Accountants are not supposed to offset liabilities and assets, they should be separate like the popcorn in those giant Christmas tins right? Cool thinking, but not exactly true because….

Substance Over Form – This is one of the Grand Daddy statements in accounting.  A unifying concept, the “Prime Directive” of accounting for you Trekkies.  This one trumps the above. The “substance” of overpayments and deposits is that they will go against receivables. So while they could be considered as liabilities in “form,” they are really related to receivables in “substance.”  See, you can bang a liability against an asset and take the net in this case because Substance trumps form.  Also note that this is generally accepted accounting practice in the real world because people account for this stuff in the AR accounts and the AR module of the accounting systems.

So Can You Hug Your Aging?

If accounts receivable were my collateral and on my BBC, I would want to have 100% of the receivable transactions in the aging report.  I would want to see all of the transactions that are right, wrong or indifferent in nature.  I would want substance over form.  I would want to hug my aging and know that it contains all of the transactions and that the potential offsets are in there for me to see.

But what about when the teenagers play games and reclassify things?  How do you find that? How do you prevent that?  What games can be played with potential offsets?  That’s what experience and training are for, to help you cover your assets.  ABLTrain Icon

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ABL-Help Updated 1998 to 2017…


In The Beginning:

What started as a glossary of definitions sometime in 1998  for my students, quickly expanded.  After 6 months of messing around with HLP file generators that used RTF documents, the first release came out in December of 1998.  It started with about 450 glossary words and about 42 ineligible collateral items for receivables and inventory.  We used Visual Basic to make a menubar and then took screen images of every menubar option and linked them.  It looked like a real menubar and it worked (HTML5 before it’s time).

The Village Comes:

But then the e-mails started to come in.  “Hey Joe, what about…” and the lists grew.  My friends at IBM inspired me to add the fishbone diagrams.  E-mails came in from all over the world and the list of ineligible items got bigger and bigger. We added audit insights for workpapers and recently we expanded into fraud alerts, alternative calculations, confirmation finders and other advanced fishbone diagrams (Pro version). It has slowed down in recent years, but it keeps growing and we’ve got 190+ ineligible links now.

Copyright Office Acceptance:

We had to argue with the US Copyright office on the filing of the electronic document as an HLP file and we presented our argument by asking “How come Microsoft can file Form TX and cover their Help files?”   Our Help File document (like millions of others) were made of code, text and images to form a multimedia presentation and the “text” was all code.  Management at the US Copyright office heard our argument loud and clear and changed the copyright form based on our presentations and the lack of solid guidance to clearly cover multimedia presentations.  Yeah, that was us and everyone was nice about it!

Just-In-Time ABL Training:

The ABL-Help file is now installed on more computers than any ABL software product in the world.  Thousands of copies and that includes installs at most of the larger institutions too.  It is considered an “essential” training tool by many back-office departments and new field examiners like the portable nature of having the program with them as they travel.  When Clear Choice Seminars, Inc. was hosting 10-12 cities per year, it was an essential tool to skip the basics and move onto more important analytics.  Of course the ABL-Help file got more and more information over the years and that let us cut out much of the basic stuff from the Intermediate ABL Audit course.


Update at least annually? – ABSOLUTELY!  The file format has changed too.  We switched from .HLP files to .CHM help files and that lead to better control, HTML formatting and the use of JS libraries for the menubars and popups.  We’ve upgraded the software used to make ABL-Help perhaps 5 times along the way and we’ve updated the compiler and installer every year.  The program and installer are also code-signed (COMODO) so that you know it comes from us.

In 2011, we switched to an EXE format so that we could give away a free version and then sell two enhanced version.  Our students ( and and software users ( get the more advanced versions.  ABL-Help Pro comes with the Fraud Prevention course on ABLTrain.  All proceeds go to charities!

The three versions are:

  1. ABL-Help Free
  2. ABL-Help Classic (about $19.00 USD or included with most ABL-Train courses)
  3. ABL-Help Pro  (about $49.00 USD or included with ABLTrain’s Fraud Prevention seminar course)

Future of ABL-Help Training Materials?

Where will it go next?  A lot of that is up to you.  We get great ideas for ineligible items from all over the world.  We have an opportunity to take it in new directions that will add value to the users.  Looks like we’re just getting started when I think about the possibilities.  [Joe]  ABLTrain Icon

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