Chapter 9: Inventory and Other Assets

1. Chapter 9: Inventory and Other Assets

2. Non-Cash Schemes • Only 13% of asset misappropriation schemes targeted non-cash assets. • The median loss in non-cash schemes was $100,000, which is higher than the median loss in cash schemes ($60,000)

3. Theft of Non-Cash Assets – Breakdown of Cases The “other” category is primarily schemes targeting intangible assets (e.g., trade secrets).

4. Theft of Non-Cash Assets -Median Losses

5. What is Inventory Fraud? • Misuse of non-cash assets • Misappropriation of non-cash assets • Larceny • Asset requisitions and transfers • Purchasing and receiving schemes • False shipments

6. Misuse of Company Assets • “Borrowing” company assets • Company vehicles • Supplies • Computers & office equipment • Results in lost productivity, increased wear on equipment, etc.

7. Inventory Larceny • Strict theft of inventory • Unconcealed on the books • Perps often highly trusted, with access to secure inventory • Examples: • After-hours theft from warehouse/storeroom • Employee and accomplice stage fake sale

8. Inventory Larceny – Countermeasures • Restrict access to merchandise • Keep merchandise in guarded, locked area • Install surveillance cameras • Use access logs to track those who enter restricted areas • Assign personal access codes to employees who are able to open warehouses, storerooms, etc.

9. Inventory Larceny – Countermeasures • Conduct physical inventory counts independent of warehousing function • Match inventory at beginning of month to balance at end of previous month • Investigate any significant shrinkage • Look for increases in cost of goods sold • Establish confidential whistleblowing mechanism

10. Fraudulent Asset Requisitions • Perp requisitions inventory/materials for project • Divert materials from job site • Very common in construction industry • Variation: • Classify inventory as damaged or scrap

11. Purchasing and Receiving Schemes • Perp usually involved with receiving/warehousing function • Steal portion of incoming shipment • Mark shipment “short” • Reject portion of shipment as “substandard”

12. False Shipments of Inventory • Perp usually involved in sales or shipping/warehousing function • Prepare fraudulent packing slip • Authorizes shipment of targeted inventory • Delivered to perp, accomplice, or mail drop • Fake sales may be created to support shipment • Receivable eventually gets written off

13. Concealed Inventory Schemes – Countermeasures • Track invoices to inventory on hand • Perform trend analysis for: • Increasing levels of scrap • High levels of re-orders • High levels of “short” shipments • Increase in bad debt expense • Reconcile materials ordered to work done

14. Concealed Inventory Schemes – Countermeasures • All shipments must be matched to sales • Independently investigate customer complaints of short shipments • Verify support for all reductions to perpetual inventory • Periodically compare customer shipping addresses to employee addresses

15. Concealing Inventory Shrinkage • Alter inventory records • Force reconciliation of physical/perpetual inv. • Adjusting entries to inventory, cost goods sold • Fictitious sales and accounts receivable • Write off to bad debts expense or discounts • Write off inventory • Lost, obsolete, scrap • Physical padding

16. Inventory Fraud Controls • Separate the following functions: • Requisition of inventory • Receipt of inventory • Disbursement of inventory • Conversion of inventory to scrap • Receipt of proceeds from disposal of scrap • All shipments must be matched to sales

17. Inventory Fraud Controls • All merchandise received must be matched to purchase order and invoice • Inventory counts should be subject to: • Complete recounts by independent personnel • Recounts of merchandise with substantial value • Spot-checks by supervisors • Inventory turnover rate and cost per unit should be regularly calculated and compared to previous years