Many organizations, including retailers, manufacturers, and contractors, rely heavily on strict inventory control. If inventory is not precisely tracked, businesses are unable to effectively produce goods, meet customer demand, and generate profits.
Let’s imagine you’re conducting a year-end inventory count and come up short. Have you counted incorrectly, or have the products been misplaced? Or has someone stolen inventory? A trained fraud expert can assist you in determining the source of these anomalies.
Assuming Innocence
Before assuming theft, fraud experts investigate whether the missing inventory was indeed stolen. Employees may have kept substandard records or failed to follow basic processes, resulting in “missing” inventory. For example, a company without a location assignment for each item (an effective mechanism of tracking surplus stock) and a well-managed returns system is at risk for misplacing inventory.
If there is no reasonable explanation for inventory loss, experts look for indications that the circumstances are conducive to fraud. Potential issues with inventory management include:
- Inadequate internal controls for purchasing, receiving, and cash disbursement
- Reliance on a single worker to perform several inventory tasks
- Insufficient managerial oversight
If an expert suspects inventory was stolen, records will likely be searched for evidence. Anything that does not follow standard inventory practices, such as significant gross margin drops, may be a red flag.
Finding Fraud Evidence
Inventory fraud can leave paper or electronic trails; therefore, fraud professionals usually check journal entries for unusual patterns. An entry indicating a physical count change made during a period when no count was taken requires further scrutiny. An expert can connect unexpected entries to supporting papers.
Vendor lists may also reveal suspicious patterns, such as P.O. box addresses substituting for street addresses, vendors with several addresses, and names that closely resemble (but differ from) those of known vendors. Even if they discover no evidence of fraudulent vendors, fraud professionals typically examine vendor invoices and purchase orders for abnormalities such as excessive invoices or reported purchases that do not involve the delivery of products. They also become acquainted with the pricing, timing, and purpose of routine purchases, identifying any that differ from the norm.
Confirming Physical Inventory
It’s also important to confirm physical inventories. A fraud expert might suggest contracting an independent organization to undertake a count and value inventory to reduce the risk that the fraudster will be on the team.
Whether employees or inventory specialists complete the work, fraud experts closely monitor warehouse activities once staff learn a count is approaching. Thieves may try to move merchandise from another area to make up for missing items that they know will be discovered.
Automating Inventory
Automate your inventory control to avoid loss caused by employees and others. Technology is reasonably priced (even for small firms) and far less expensive than potential fraud losses. Please contact us for more information.
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