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Preventing Inventory Fraud


A company’s inventory is often one of the largest assets on its balance sheet. Unfortunately, inventory doesn’t always receive the careful monitoring it deserves – often at the expense of a company’s bottom line.


Whether you deal with raw materials, parts, supplies, or finished goods, it’s common to find small discrepancies between your inventory on hand and the information in your system. These discrepancies may come from everyday factors like damage, clerical error, or delayed data entry, but they may also result from employee inventory fraud. For many companies, an inventory shortage that exceeds 3% is cause for concern.   


Know Your Risk 

The risk for inventory fraud varies by industry, type of inventory, company size, and other factors. Retailers, manufacturers, and contractors that stock parts and materials often face the highest risk. Theft is especially common among companies with high-value inventory such as electronics, jewelry, brand-name merchandise, or items that can be easily resold. Also, if your inventory recording process is especially complex, this may create an opportunity for a dishonest employee to cover up theft or bury another kind of accounting fraud.


Set Up Controls

While background checks and references can help you find trustworthy employees, it’s still important to have safeguards in place to deter and catch employee fraud. Physical controls, like video surveillance and secured access points, are often crucial. Making sure employees carefully record warehouse activity and inventory movement can also maintain accountability. Because manipulating your inventory system can happen even in the absence of physical theft, it’s important to have inventory accounting controls that are as rigorous as those for cash management.


Prevent Discrepancies

Habitual or systematic inventory theft can go unnoticed for many months. Sometimes the discovery of theft is only by chance or because of a glaring accounting disparity. Clearly defined protocols can help you detect theft earlier or prevent it altogether and can also help reduce losses due to carelessness. Train your employees on the proper way to stock, transport, price, and record inventory, and make sure the handling of damaged, defective, or lost items is consistent. Conducting spot checks and monthly inventory counts can help you catch and correct errors before they cause major problems.


Get Outside Help

Hiring an outside team to perform an inventory count on a regular basis, such as once a month or once per quarter, can help you keep a clear picture of your inventory and improve your reporting. While third-party counts add a new recurring cost, the resulting improvements to your inventory process and reduced losses can more than make up for this expense.     

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The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.