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Is Your Inventory Subject to Fraud Risk?

Inventory is highly susceptible to fraud in the form of misstated financial reporting and misappropriation of assets. Either type of fraud is detrimental to your company.

How does inventory fraud occur?

• Including nonexistent inventory items in the physical count (e.g., empty boxes)
• Improperly recording transfers from raw materials or work in process
• Making unauthorized adjustments of inventory records to conceal misappropriation of assets or improve the performance picture
• Altering inventory counts for items the auditor did not test-count
• Programming the computer to produce fraudulent physical quantity tabulations or priced inventory listings
• Manipulating inventory counts for locations not visited by the auditor
• Counting inventory in transit between locations more than once
• Physically moving inventory and counting it at two locations
• Including in inventory merchandise recorded as sold but not yet shipped to a customer
• Arranging for false confirmations of inventory held by others
• Including inventory receipts for which corresponding payables have not been recorded
• Overstating the stage of completion of work in process
• Manipulating the "roll forward" of inventory taken before the financial statement date
• Failing to report scrap sales
• Including physically lost or obsolete items in inventory
• Including consigned and other inventory not owned by the company in the company’s inventory
• Applying labor and overhead inappropriately to work in process or finished goods

The list does not stop there. 

You might not immediately see the impact of fraud on your company. However, when inventory fraud becomes significant, it can be disastrous, both internally and to external relationships that rely on the reported results. 

What can you do to prevent fraud? Be diligent in establishing inventory controls and reviewing the results. 

Questions about controlling inventory fraud? 
Contact Paul Oetter, Partner, at 312-980-2920, or your Blackman Kallick representative. 
Our thanks to Phil Laycock and Steven A. Baer for their contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.