FraudBasics
My question was this: Were the invoicing practices of a national appliance repair company fraudulent? (To maintain the company’s anonymity, I’ll refer to it as SR, short for Service Repair, in this column.) I experienced SR’s confusing invoicing firsthand, which prompted me to research the company on the Web. I also called the company, but my contact refused to discuss anything other than my specific case.
Incompetence that serves SR’s interest to the disadvantage of its customers can be interpreted as self-serving, and self-serving incompetence can be interpreted as fraud. My purpose in this column is to offer some insight into how one might distinguish between incompetence and fraud and to help steer potentially wayward companies in the right direction.
However, before discussing risky invoicing practices further, it’s important to understand that SR’s desire to maintain a national network served as the context for its irregular invoicing practices.
SR had difficulty:
- Sourcing contractors across geographies (In some places, SR repair personnel were available only two days a week; in other areas, contractors were available five days a week.)
- Determining whether a recurring problem was due to misdiagnosis or a faulty repair job
- Ensuring that the contractor communicated the same information to the customer and to SR’s central service desk
The most crucial challenge was the third one. When customers called the service center to ask questions about their bills, they were likely to discover that the repairman’s breakdown of the bill differed from that of the service center. The discrepancy left the customers wondering:
- What was the recorded duration of the repairman’s visit?
- Should the fee for the service call be waived or not?
- Was the charge determined by the type of problem that was repaired or by the repairman’s time on the call?
Interestingly, there was an incentive for SR and the repairman to tolerate different breakdowns for the same service call. The ambiguity allowed both parties to shape their interactions with the customers to their benefit.
SR wanted to attract customers. When customers called to schedule a service call, SR customer service explained that there would be a charge for the repairman to show up. However, if the repairman fixed the problem, the service call charge would be
waived, and only the cost of the repair would be charged. SR customer service would further explain that the cost of repair would depend on the problem and the type of repair necessary, rather than the duration of the repairman’s visit. In other words, SR implied there were specific fees for specific jobs and that repair time and professional expertise were embedded in the fee structure. The reasoning was that different repair jobs required different levels of effort and time and also different spare parts.
Yet, when on the job, the repairmen wouldn’t charge the customer by the type of repair. Rather, they would charge the customer the service call fee and labor time. To align the invoice with the initial pitch that the service call fee would be waived if the problem was repaired, the repairmen would provide a different version of the bill to SR’s customer service. When speaking to the service desk, the repairmen would claim additional labor time equivalent to the service call fee. This enabled the service center to tell customers that the invoice (at their end) showed that the service fee had been waived.
This was the catch: The two versions of each invoice showed the same totals; it was only the breakdown of costs that didn’t match. The mismatching breakdowns, when explained, were confusing to customers. Furthermore, customers who called to complain about charges were likely dissatisfied with other aspects of the service call besides the bill. These other sources of dissatisfaction colored their perceptions of SR, predisposing them to interpret the company’s billing practices as incompetent versus fraudulent.
But was there fraud in the picture? I believe it was self-serving incompetence, but it could initially look like fraud to customers and authorities. SR was benefiting from the ambiguity inherent in its invoicing practices: It attracted customers with its claim that the service fee would be waived, and repair personnel were able to maximize their income, which aided in retention and maintaining geographic coverage. Customers paid slightly more than what was implied by SR’s promise that the service call fee was waived, and that the cost of repair was determined by the type of repair rather than labor time.
Likely, the company didn’t have the resources to streamline its invoicing practices when it first opened. In the beginning, instances of miscommunication were a minor problem compared to the challenge of attracting customers and maintaining a network of repair personnel across North America. Over the years, however, flawed invoicing became entrenched, and it evolved to serve the interests of both SR and its contractors – to the detriment of customers. Today, any third party who isn’t sympathetic to SR’s growing pains will interpret its self-serving incompetence as fraud.
PREVENTION METHODS
Before consumer groups and the courts read into SR’s practices as intentionally misleading and defrauding customers, SR should stamp out the ambiguity in its invoicing practices and treat customers as partners. It should bring all three stakeholders to the table and find out their expectations:
- How much do repair personnel expect to earn?
- What are customers willing to pay?
- What should SR’s revenue be?
Once it answers these questions, SR should assign analysts the task of deriving the business requirements for a technology solution. There are no great secrets that SR needs to hide. Appliance repair is a well-established line of business, and there are no trade secrets to protect. SR has more to gain than to lose from operating in a forthright, transparent manner.
While I’m generally cautious about throwing technology at problems, especially ones that have to do with ethics and compliance, technology can help bridge the communication gaps among SR customers, the customer service desk, and repair personnel – as long as SR devises a blueprint for allocating the value of its services, and customer service and repair personnel buy into that plan.
The technology solution should do the following:
- Record on a handheld device the repairman’s arrival, the distance traveled, the repair problem, the likely repair outcome, and the estimated cost. The repairman will show these inputs to the customer when asking for the customer’s approval to proceed with the repair job and e-mail these inputs to SR customer service.
- Factor in additional compensation to contractors if they only have one or two visits a day or have a long drive to reach a customer. This additional marginal cost will be shared with the customer.
- Generate an invoice that includes the departure time and cost of repair that the repairman can share with the customer and e-mail to customer service for its records. The customer will receive an e-mail version of the bill and, for a nominal fee, a hard copy of the bill from SR customer service.
With this plan in place, the fraud risk will be minimized, and the threat of litigation and negative publicity will be removed. Also, it will promote fairness in compensation to contractors and improve SR’s standing with customers, who will appreciate SR’s attempt to make the appliance repair experience clear-cut and transparent.
These are good internal control lessons for fraud examiners who work for national or regional retail companies with heavy customer-service relations.
Amitai Touval, Ph.D., is an adjunct professor at Metropolitan College and a senior consultant with ITAP Americas.
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