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Does Your Business Have Strong Internal Controls to Avoid Inventory Theft?

Inventory can be a major component of current assets on the balance sheet, but is that number accurate? Inventory opens the gate to employee fraud, making strong internal controls over inventory reporting critical. Other aspects of inventory that should be considered are independent third-party counts, surprise inventory counts, using an inventory management system, and utilizing automation.

Independent Third-Party Counts

The first way to maintain effective internal controls over inventory is to have independent inventory counts. If inventory counts are done by employees, they could be covering up theft or fraud within the organization and adjusting the inventory numbers in their favor. This would lead to missed fraud detection and asset loss, which can lead to high replacement costs and legal fees. By bringing in an independent third party to do the inventory count, you can mitigate this risk.

Surprise Inventory Counts

Further, inventory counts should be random and done at various points throughout the year. This mitigates the risk that employees are altering the inventory in any way in an attempt to conceal fraudulent activities. Random surprise inventory counts should be conducted multiple times throughout the year, especially for big companies with large amounts of inventory on hand. The higher the inventory amount on hand, the greater the risk of fraud.

Use an Inventory Management System

As your company begins to grow, you should consider scaling-up your inventory management system to account for the increase in inventory levels. An inventory management system for a smaller company may not include all the necessary features that are needed when your company begins to grow. You may believe that your system is working just fine but be sure to double check the compatibility to avoid inaccurate reports. If you begin to notice large discrepancies in your reports to what is actually on hand, consider reorganization of your system.

Automation is Key

Inventory automation can improve the accuracy of your inventory reports. Automation of your inventory can allow you to streamline fulfillments and boost supply chain management efficiency. Not only can this save you time and money, but it can allow you to better track your inventory levels without copious amounts of time spent counting each piece. Clear insight across all inventory operations is attainable with the use of automation.

GG Observations

Effective internal controls over inventory reporting remains critical to deter fraud and ensures accuracy of inventory on hand. Implementing the controls discussed above are all necessary to maintain control over your inventory. At Grewal Guyatt, our experienced team of professionals can review your current internal controls around inventory management and recommend any areas of improvement. Our team of professionals can also perform independent third-party surprise counts on a sample basis as a special engagement.

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Alessandra Leggio

CPA, CA, CPA (Florida), CAMS, CFE, CFI

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