Protecting your company’s inventory involves more than just guarding against physical theft. While setting up controls to prevent traditional inventory theft is important, it’s just as crucial to monitor and implement controls for your company’s inventory record-keeping. If your company is a retailer, manufacturer, or other inventory-based business, taking steps to prevent fraudulent inventory accounting is a must.
Why It Happens
This type of fraud commonly hides inventory theft, but covering up an inventory disparity isn’t the only motive for this crime. Dishonest management or accounting staff may manipulate inventory records in order to disguise or fund another scheme, such as reporting fictitious sales, skimming funds, tax fraud, or overstating earnings to deceive lenders or stakeholders.
How It Happens
The way a dishonest employee commits inventory fraud depends on the scheme being committed and the individual’s access to the inventory system. Common methods include:
Looking into possible fraud in your inventory system isn’t as straightforward as investigating regular theft. A midsize company may see thousands of entries in its perpetual inventory system each year, and these transactions sometimes include subjective estimates that make it harder to detect fraud than in other types of accounting. Also, when numerous employees are involved in the reporting process, whether directly or indirectly, it can be difficult to pinpoint the source of suspicious activity.
Middle-market executives can follow these steps to boost transparency, accountability, and accuracy in their company’s inventory management:
Investigating Possible Fraud
Routine changes, such as overhead allocations, inventory value adjustments, and write-offs of lost, damaged, or obsolete inventory, make it hard to distinguish ordinary fluctuations from deliberate manipulation. Because investigating inventory fraud is a complex process, consider hiring a forensic accountant to review and verify inventory documentation and collect the evidence needed to put a stop to this crime.