Uncovering Employee Theft & Prevention

Fake Sales and Shipping: Necessity for Inventory Control

The president of the company received a call from his one of the long-time customers, who told him that the price for cash on delivery (COD) is half of the regular price for net 30 days. The customer was paying cash to the company driver for more than a year and he should have known the COD price many years ago so that he could have saved lots of money.

The president was shocked and thought that there is something wrong with the inventory and warehouse operations. He found out that a few employees including the warehouse manager have colluded to steal products without invoices, packing slips, shipping instructions. They did not run the inventory programs and collected cash from customers directly. Cash has never been submitted to the company’s Accounts Receivable department. After the investigation, the company fired those employees.

The company’s computer system, inventory module, has never been working properly. The company does not have inventory perpetual records. When the controller prepares the monthly financial statements, the inventory balance is calculated based on physical inventory count.

There are lot traceability functions (material lot and product batch numbers) in the computer system and can track all products. The company cannot identify why their inventory has shrunk physically, but not in the computer system.

Due to the lack of adequate inventory control system, the company suffered from the following:

• Employee theft, approximately $500,000
• Insufficient manufacturing plan (the factory manager stay late all the time because he does not accurate inventory records from the production plan

The management should recognize the total cost which is far more than the good integrated computer system such as SYSPRO. By implementing checks and balances in their accounting system, we were able to prevent any employee from actually attempting to steal inventory.

We are a small, local CPA firm headquartered in Monterey Park, California. We have been providing comprehensive accounting and tax services for closely held companies and small to medium-size companies for over 20 years.