Armanino Blog

Down for the Count: Detecting Inventory Fraud

March 21, 2012

Like any type of employee scam, inventory fraud can lead to losses that can go undetected for long stretches of time. Many companies are particularly vulnerable to such fraud, though, because of risks that are inherent in the way they do business.

Three Common Fraud Techniques
It’s not just sticky fingers that companies need to worry about with their inventory. Several other fraud techniques are also common and potentially more costly.

Three in particular are:
1. Fake sales. The employee on the cash register fails to ring up an item for an accomplice or rings it up at a lower price.
2. Returned goods. The register worker rings up an item at a lower price and subsequently processes a return for the accomplice at the full price.
3. Requisition fraud. A manager inflates customer demand for an item and pilfers the excess items ordered. Or the manager submits an invoice for inventory that wasn’t really ordered, diverting the payment to a fictitious business.

Taking Stock, Getting Help
A variety of ill-advised practices can invite inventory fraud. For example, granting too many employees access to inventory can literally leave the door open to theft. Fraudsters can also take advantage of inadequate recordkeeping systems and a company’s failure to track every item with location assignments. In addition, weak purchasing, receiving and disbursement controls make it easy for perpetrators to cover their tracks.

Who can help detect these weak spots? A fraud expert. In examining a company’s financial records, he or she can look for unusual journal entries posted for inventory, such as an entry making a physical count adjustment during a time when no inventory count had been conducted.

A fraud expert will also scan the books for large adjustments after physical inventory counts, significant drops in gross margins and repeated issues with out-of-stock inventory. Moreover, he or she may check for invoices or purchase orders with no corresponding record of delivery, as well as discrepancies among the amounts due according to the invoice, the purchase order and the payment record.

An inventory fraud investigation goes beyond the company’s books and financial statements, too. An expert might find hints of inventory fraud in documents such as vendor lists — revealing vendors that are using post office boxes or multiple addresses, which are possible signs the business is paying a fictitious vendor.

AMLLP's External Audits Team has the knowledge and experience to review your current fraud prevention measures and provide insights and expertise in improving it.

Reducing your Risk
Unfortunately, some amount of fraud in any organization is virtually inevitable. But companies can reduce their risk of losses, whether from inventory fraud or other crimes, by establishing a formal fraud prevention policy and implementing an anonymous tip line.

March 21, 2012

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