Impact and Prevention of Inventory Fraud

Topics: Balance sheet, Inventory, Fraud Pages: 2 (517 words) Published: November 13, 2010
Impact and Prevention of Inventory Fraud
The root of this problem lies within the organizations’ employees. Honest employees are a valuable asset, since the theft of inventory costs US companies a great deal of money every year. Perpetrators of this act may rationalize their behavior as not being criminal, so where does it begin or where does it stop? There is no easy solution or one way to combat inventory fraud, but companies can take measures to prevent this from occurring. Also, Organizations need to be aware that elaborate schemes may include management and its vendors/ suppliers.

The impact of inventory fraud can be expensive and affect an organization’s reports. Inventory errors will not only affect the balance sheet but the income statement as well. Errors from theft or fraud within the physical inventory will misstate the costs of goods sold, gross profit, and net income. If the losses from fraudulent are covered up, the organization will be misleading the government by not abiding by the fair disclosure responsibility, and basically guarantees unreliable and false information within its financial documents.

Prevention is the key to deter this type of fraudulent behavior. Strong controls, policies that communicate theft will be prosecuted, and a hotline can be introduced to this incidents. Since employees are at the heart of this problem, companies should have criminal and background checks on employees before they are hired. However, criminal and background checks do have there limitations, since the majority who steal may have never been caught. In addition, companies can also be checked to ensure that they have a valid tax id number, and that no complaints have filed with any agency such as Better Business Bureau. Random inventory checks instead of pre-planned inventory counts should be used. The inventory counts should match what is on hand to what is on record. In addition, to prevent collusion amongst employees during the inventory count the...
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