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By Cindy Lusk
Situation Overview
A small family-owned distributor suffered a loss of an estimated $2 million dollars in inventory. Several factors played into the inventory theft, including poor internal controls and a lack of timely accounting records, as well as the inherent difficulties in measuring and tracking certain stored inventory items.
The theft was perpetrated by several long-time, trusted employees over the course of several months. A portion of the inventory was delivered to the company’s customer and a portion of the inventory was redirected and sold for cash which was split among the accomplices. One of the employees involved was responsible for recording inventory shipments. Misappropriated deliveries were shown as delivered to the company-owned retail outlets or consignment stores. As a matter of company procedure, the company-owned retail outlets and consignment stores were not invoiced upon delivery of inventory. Inventory was not reconciled or monitored for the retail outlets or consignment stores, which enabled the misappropriated inventory to be removed from inventory records without detection.
Measures That Could Have Prevented the Theft
Internal control is an important theft deterrent and should include procedures such as segregation of duties and critical accounting routines, as well as supervision and review. Certain responsibilities should be segregated. In this case, employees with access to physical inventory should not have access to the inventory records or the ability to make adjustments.
Critical accounting routines should include monthly financial statements and account reconciliations with appropriate review and supervision. In addition, documents such as pre-numbered packing slips and receiving reports should be utilized to support the account reconciliations. Pre-numbered packing slips should be signed by customers as evidence of receipt of goods and acknowledgment of shipment date and should be matched to customer sales invoices. Inventory receipts should be recorded on pre-numbered receiving reports and matched to vendor invoices. The pre-numbered packing slips and receiving reports should be accounted for on a monthly basis.
It is important for management and owners to take an active role in supervision and review, especially in smaller businesses where the limited number of personnel does not provide for adequate segregation of duties. Financial and non-financial data should be monitored on an ongoing basis. Management should consider current industry trends, comparisons with historical data and various financial and non-financial data and ratios when evaluating and analyzing the performance of the business.
Measures That Could Have Detected the Theft
In this case, an employee without access to inventory should have reconciled physical inventory on hand, including consignment store inventories, to quantities received and sold (as supported by the receiving reports and packing slips), which would have highlighted the discrepancies in inventory.
Management review of monthly financial statements and comparison of ratios, such as inventory turnover and profit margin would also highlight unexpected inconsistencies.
Steps to Take if You Suspect Fraud
If you suspect fraud, contact your legal counsel and a certified fraud examiner/forensic accountant. These experts can analyze your company’s data to determine if there has been a misappropriation of company assets and also determine the extent of the misappropriation. Decosimo has a team of forensic experts who would be glad to assist you.
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