The Re-Invention of Lying – Reverse Factoring

Traditional factoring is when a company wants to borrow against receivables, ie money owed to them for supplying a product or service.

Reverse factoring is when a company owes money and it wants to delay making that payment. For example, a company is much better off, in cash flow terms, if they can make the payment in 90 days rather than 30 days. The supplier is asked the question: do you want to get paid in 90 days, or do you want to get paid in 30 days by a lender who will charge a small discount fee?

But in accounting terms, is this simply an extension in payment terms, or is it a loan? This is an important question if you are trying to work out how much debt a company is obligated to. If it recorded as an extension in payment terms, then debt is understated, and you have a work around any debt covenant tests.

And, if you could understate debt, what could possibly go wrong?

Carillion Plc was a British multinational facilities management and construction services firm. The company entered liquidation in early 2018 after hiding 750 million (pound sterling) of debt via a reverse factoring facility. A UK parliamentary report targeted the government regulators, Carillion’s board and the “complacent” 19-year tenure of the KPMG, the Auditor. A conflict of interest arises when an Auditor, who is paid by the company, is required to scrutinize the books.

Via the AFR: “”This is crack cocaine for CFOs – once they start using it it’s very difficult to stop,” (Ownership Matters). By choosing to report financing cashflow as operating cashflow, a company could make its cash conversion appear better than it really is.

Also, from the AFR (20^th Aug): “Telstra ramped up its use of “reverse factoring” to almost $600 million from $42 million in the space of 12 months, becoming the latest example of a large cap Australian company to embrace the hard-to-detect cashflow weapon”.

Fitch Rating said that reverse factoring essentially served as a debt loophole. Banks market this facility aggressively, with the lack of disclosure being one of its main selling points.

Fitch Rating indicated that there may as be as much as $327 billion in additional reverse factoring since 2014. This, of course, greatly amplifies systematic risk, since any deterioration in financial conditions will increase the chances of a sudden default as credit facilities are withdrawn.