How accommodation bills help firms misuse LCs to siphon off bank funds

A leading Chennai-based chartered accountant firm has opined that a bank LC could be used as a façade by a company to divert any suspicion on the underlying business transaction to siphon off money. This will be carried out without the knowledge of the bank providing the LC, since it relies only on the credit worthiness of the company and has very little information on the supplier.

This diversion of funds is facilitated in the form of accommodation bills. It is possible for companies to siphon off money equal to the entire equity investment and possibly more through this method. This issue needs serious consideration from all lenders and their stakeholders, says Yuvaraj Viriyambakkam, a Chennai-based Chartered Accountant who specialises in forensic and investigative audit.

Tracing accommodation bills

“Based on our experience, a thorough verification of the numbers and books by leveraging some specialised methodologies will help identify such accommodation bills. We need to note that such methodologies used (by companies) would vary from sector to sector and even amongst companies. However, the basic framework (laid out below) will act as a guide to identify the issues,” he says.

Accommodation bill is an effective tool for promoters/shareholders to reduce equity investment in a company (if not on a permanent basis, at least on a temporary basis). This helps them take out money from the company and also increase the bank funding by way of additional working capital facility.

An accommodation bill refers to a bill, draft, or note made, drawn, accepted, or endorsed by one person for another without consideration to enable that other to raise money or obtain credit thereby. One of the ways in which such accommodation bills are misused is to book purchases without any actual purchase of materials. This is one among the many avenues available for companies to siphon off money.

Two-step process employed

Yuvaraj Viriyambakkam says his firm has explored ways in which companies in the infrastructure sector create these accommodation bills and how this could be identified. The modus operandi is for the borrower company to raise a purchase order on another company, usually not someone they transact with, on a regular basis.

The borrower company wouldn’t receive any material. However, account for materials as if received at the contract site and add it to unbilled receivables. This would inflate their drawing power for working capital loan from banks and fund the business through bank funds without sufficient equity buffer.

“We need to identify such accommodation bills in a two-step process. Step 1: Check for disproportionate increase in unbilled receivables in a project in any month. Step 2: Check for spike in purchases from a supplier who the company has not transacted with on a regular basis. Check the document trail for identifying actual receipt of materials.”

Jump in unbilled revenue

There needs to be a clear document trail for the purchase that we find to be suspect. The chain begins from the purchase order all the way to the issue slip at the project site for consumption of inventory. A few examples would be (a) delivery challan from the supplier needs to have the company gate seal (b) the LR (lorry receipt) needs to have the client's seal. Insisting on a proper document trail will expose the fraud being perpetrated.

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