How Inventory Fraud is Impacting Dealerships

Preventing Revenue Loss through Inventory Controls

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As a large portion of the dollar value assets of equipment dealers, inventory is often found to be the target of fraud. Why? The theft of physical assets is common as inventory items are often numerous, may be readily accessible and removable, and are typically not well protected. In addition, these items may not be immediately missed – if missed at all. What’s more, inventory fraud can be easy.

Financial Impact of Theft Hits Dealers Hard

 “Unfortunately, while no dealer can afford the revenue loss suffered from theft, we’re really seeing a detrimental impact on smaller companies [fewer than 100 employees],” says Marc Johnson of K·Coe Isom. According to a 2014 study by the Association of Certified Fraud Examiners (ACFE), the typical organization loses a median of 5% of revenues each year.  “That’s a huge financial setback for any size of dealer,” adds Johnson.

Inventory Fraud Can Happen to Anyone, and It Does:

Recently, we worked with an equipment dealer who detected theft of inventory. The theft occurred both in parts and small equipment. It turns out that one employee was using the parts returns from other stores to conceal stolen parts. This person was then selling the parts taken out of the company’s inventory on the side.

Meanwhile, another dealership reported that an employee was removing items from boxes in the warehouse (so that it appeared that the inventory was still there), then stealing and selling the items.

Unfortunately, in both of these cases the employees that had been stealing from their employers were not obvious to the employer. Offenders are even found among long-time employees – believed to be both trustworthy and reliable. Think about the number of times you’ve heard about cases of fraud that has occurred in some unthinkable places: nonprofits such as libraries and churches, as well as Fortune 500 corporations and small family-run businesses.

According to Ryan Dreher of K·Coe Isom, “While there’s no immunity to fraud, there are methods that can both detect theft and deter unfavorable activity.”

Implementing Prevention and Detection Methods

Easy access. Un-detectability. Single authorization. Unverified physical stock. Altered documentation. These are all easily-solved vulnerabilities for inventory areas. By placing basic controls within your dealership, you can greatly limit, and deter, employee and third-party theft:

  1. Make sure that you are counting every piece of inventory at least once a year. Verified stock-takes and record comparisons can determine if stock is missing.
  2. Check physical inventory. When counting inventory, touch every box to make sure that it is full.
  3. Pay attention to inventory adjustments. If you are noticing too many, you will want to look into more detail to see why.
  4. Train other departments. Educate employees on what to look for, and when to ask questions – and account for even the small dollar items. Many times fraud can show up in other places (not just in inventory) when an employee is trying to conceal a theft.
  5. Limit access. Add physical security – in addition to monitoring, access to relevant inventory should be limited with proper documentation.
  6. Independent authorization. Don’t allow a single-person sign-off. Separating duties and adding another required signature to look over documentation can add a layer of control.

“Inventory observations are a very crucial part of running the business – and not just from a fraud protection viewpoint. With the assurance that inventory levels are correct, management is able to make more confident strategic decisions,” advises Dreher. “Inventory control is a win-win for dealerships.”

Contact a K·Coe Isom advisor with questions about internal controls and accounting tasks that can deter fraud.

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