Small manufacturers often operate like families. Owners can’t fathom that a trusted “family member” would ever steal inventory. But it happens more often than you might think. When faced with financial pressure and given an opportunity to steal, an employee may rationalize the theft of inventory.
For example, personal financial pressures or addiction may entice an employee to steal inventory or overstate it — especially if he or she discovers a weakness in the internal accounting policies and procedures. The employee may rationalize the theft because he or she feels underpaid, underappreciated or overworked by an owner who takes frequent vacations.
Whatever their motives, employees use a variety of techniques to steal inventory. The most obvious is directly taking items for personal use or resale. Physical controls are the best prevention tools here. To illustrate, warehouses should have a limited number of doors with 24-hour surveillance inside and outside of the facilities, including dumpsters, trucks, foliage and parking lots.
Inventory fraud may also occur within the accounting department. For example, the controller or CFO may try to overstate inventory by artificially inflating inventory counts or values, recording false entries into the general ledger, or failing to write off old, obsolete or damaged items.
Moreover, the inventory account may become a “slush fund” for other internal fraud schemes. Inventory overstatements might be used to manage earnings or to meet financial covenants.