Nine Red Flags of Inventory Fraud
It was a gut instinct. A flash of intuition. It came and – in the crush of daily business operations – it went. Too much inventory. Too much scrap. The buyer living beyond his means. The bookkeeper. Or even the CFO. Naaaaah. No one would be that bold. Or would they?
Inventory fraud can take many forms. Kickbacks, diversion of product, and falsification of invoices are common schemes. Red flags include:
1. Excessive inventories leading to waste and lost profits. When a buyer receives kickbacks based on a percentage of product ordered, he is incentivized to buy far more than the company needs.
2. A surge in scrapped products or materials.
3. Significant and repeated employee resistance to changes in operating procedures, suppliers, and vendors as well as their refusal to produce accurate inventory data.
4. Inventory audits that yields unrealistically perfect results or a notable and unrealistic lack of claims against suppliers for damaged materials and supplies.
5. Negative attitudes, references to the company’s “deep pockets” that rationalize waste, and a mindset that demonstrates loyalty to suppliers, not to the company or its clients. For example, employees and suppliers may vacation together.
6. Unreasonable inventory depreciation practices employing depreciation terms that exceed the useful lifespan of the product.
7. An absence of electronic data-collection systems that enhance accountability and permit real-time analysis of the amount of inventory needed to fulfill customer orders, of actual purchases, of overages, and of scrap.
8. Procurement procedures in disarray with no indication that the procedures have been widely distributed or that employees understand or adhere to them.
9. A lack of internal controls such as a segregation of duties between individuals who initiate and control procurement and those who control inventory.
If you suspect inventory fraud in your organization, let us discuss with you a plan of action. Call 773-929-3030.