All business owners should be aware of the potential risks and the appropriate procedures to have in place to minimise the risk of inventory fraud. Inventory fraud can transpire across all facets of small and large businesses.

This type of fraud usually takes one of two forms. It may involve the theft of physical inventory items by a rogue employee with access to a company’s asset inventory. Evidence is likely to be a large number of damaged goods being written off, or customer complaints regarding missing/lost items.

Alternatively, it may involve the misstatement of inventory records on a company’s financial statements. Typically this requires cooperation of those individuals with responsibility for financial reporting. A company looking to report a higher net profit may be tempted to overstate its inventory to produce an inflated profit figure that can be used to mislead shareholders / investors / tax authorities or to obtain loans against assets. Typical warning signs would be inventory values rising quicker than sales rates, sudden changes in inventory turnover, or shipping invoices that cannot be traced to sales/purchases.

There are a number of simple precautions that can be put in place to minimise the risk of inventory fraud. One approach is simply to itemise individual company assets or split responsibilities between those staff responsible for distribution and invoicing of assets. The installation of a security system and background checks on all new employees may also reduce the potential risks.

Knowledge is key when dealing with potential inventory fraud. You should ensure you know both your inventory and your staff.

Fraud detection specialists and experienced fraud examiners can perform a vital and valuable service for companies who may have fallen victim to fraud. These experts can analyse the information to determine if there has been a misappropriation of company assets and determine the extent of any loss.

KEYS Global, a fraud investigation and asset recovery firm based in Bermuda, wrote this article as a way to increase community awareness about fraud. For more information contact Mathew Clingerman, managing director, KRyS Global at Mathew.Clingerman@krys-global.com