Fraud Schemes Related to Inventory
Inventory fraud schemes are fraudulent activities that involve the theft, misuse, or misrepresentation of a company’s inventory. Here are some common examples:
- Physical Theft of Inventory: This is the most straightforward form of inventory fraud, where employees steal physical goods from the company’s inventory for personal use or resale.
- Inventory Shrinkage Fraud: This type of fraud involves an employee intentionally miscounting or misreporting inventory quantities during a physical count to cover up theft or misappropriation.
- Purchase and Receiving Schemes: An employee may collude with a supplier to overstate the quantity of goods received or the cost of goods purchased. The employee and supplier then split the excess payments.
- Sales and Shipping Schemes: In these cases, an employee might collude with a customer to ship more goods than were paid for, then receive a kickback from the customer.
- False Inventory Valuation: An employee might overstate inventory values on the company’s financial statements to hide theft, make the company’s financial position look stronger, or achieve performance targets.
- Inventory Transfers: This involves an employee transferring inventory items to different locations without authorization or without recording the transfers, often to cover up theft or unauthorized usage of inventory.
- Scrap Sales Fraud: Employees may steal items categorized as scrap and sell them without the company’s knowledge or permission.
Preventing inventory fraud typically involves maintaining strong inventory controls, segregating duties related to inventory management, conducting regular physical inventory counts and reconciling them with recorded quantities, and implementing systems that track inventory movements.
Example of Fraud Schemes Related to Inventory
Here are examples of inventory fraud schemes:
- Physical Theft of Inventory: An employee working in a warehouse for an electronics retailer takes a few smartphones off the shelves and sneaks them out of the building to sell online. This is a clear example of physical inventory theft.
- Inventory Shrinkage Fraud: A bookstore employee has been stealing books over a period. During a routine inventory check, the employee deliberately miscounts and reports higher numbers to match the records, thus covering up the theft.
- Purchase and Receiving Schemes: An employee working in the receiving department of a company colludes with a supplier. The supplier bills for 100 units of a product, but only delivers 90. The employee verifies receipt of 100 units, and they split the proceeds from the sale of the missing 10 units.
- Sales and Shipping Schemes: An employee in a clothing company’s shipping department colludes with a customer. The customer orders and pays for 50 shirts, but the employee ships 60 shirts and receives payment for the extra 10 directly from the customer.
- False Inventory Valuation: A manager at a manufacturing company realizes the company is not going to meet its projected earnings for the year. To close the gap, they overstate the value of the company’s inventory, thus artificially inflating the company’s assets and net income on the financial statements.
- Inventory Transfers: An employee working at a chain of hardware stores moves items from one store to another without recording the transfers, then sells the unrecorded items and pockets the cash.
- Scrap Sales Fraud: In a manufacturing company, an employee tasked with disposing of scrap metal secretly sells it to a scrap dealer and keeps the profits.
These examples illustrate how inventory fraud can be committed at various points in the supply chain, from receipt of goods to inventory counting, and even during disposal of scrap. Strong inventory controls and regular audits are crucial in preventing and detecting such fraud.
