One of the most difficult administrative tasks for retailers, manufacturers, and contractors is keeping tabs on inventory. If the numbers do not seem to add up during your physical inventory count, it may be time to bring in a fraud expert to uncover the source of the discrepancy.
Stolen or misplaced
Before assuming theft, a fraud expert will determine whether the items were really stolen or simply misplaced. In many cases, employees keep sloppy records or fail to follow proper procedures, resulting in ‘missing’ inventory.
If there is no innocent explanation for missing inventory, the expert looks for signs that the environment is conducive to fraud. For example, a company with poor controls over purchasing, receiving, and cash disbursement is at high risk of inventory theft.
When experts believe inventory could have been stolen, they comb records for clues. Anything that does not follow established inventory procedures could be suspicious, such as odd journal entries posted to inventory or large gross margin decreases.
Paper trail
Next, the expert works to prove the fraud. Perpetrators may leave a paper (or electronic) trail, so experts typically review journal entries for unusual patterns. An entry recording a physical count adjustment made during a period when no count was taken obviously warrants investigation. The expert follows up by tracing unusual entries to supporting documents.
Vendor lists also may show suspicious patterns, such as post office box addresses substituting for street addresses. Even if no evidence has been found, fraud experts look at vendor invoices and purchase orders for anomalies such as unusually large invoices.
Discrepancies between the amounts due per invoice, the purchase order, and the amount actually paid warrant investigation. Finally, experts familiarize themselves with the cost, timing, and purpose of routine purchases and flag any that deviate from the norm.
Physical evidence
It is obviously important to confirm physical inventory as well. Although a count performed by employees may disrupt normal business routines, it is a good way to learn exactly what merchandise may be missing and could lead directly to the thief. Fraud experts observe warehouse activity once employees realize a count is imminent because thieves may attempt to shift inventory from another location to substitute for missing items.
Inventory at remote locations also can disappear. So, fraud experts often will confirm quantities with the storage facility.
Limit the damage
Stolen inventory can damage your company’s bottom line and reputation.
Stolen inventory can damage your company’s bottom line and reputation. Our team of business advisors can help find your missing goods and the thief. Contact us today to learn how we can assist you and your business.