Inventory & Fraud
Sep 09, 2013
Can being a costing expert help you to commit fraud? I am certainly not trying to provide anyone ideas. Countless publications have circulated articles about the numerous ways to commit fraud by manipulating inventory numbers. The methods are endless: recording fictitious inventory, manipulating inventory counts, non-recording of purchases and fraudulent inventory capitalization. All these elaborate schemes have the same goal of illegally boosting inventory values and increasing profits.
This topic comes on the heels of recently discovering an individual using an elaborate web of calculations to cost a Company’s some 2000+ products. The spreadsheets were driven by out-of-date, inaccurate data and, as I mentioned in my last post, have been scrapped and rebuilt for temporary purposes so the Company can keep operating.
Unfortunately, as the engagement continues, we discovered that like in many other Companies, the bonuses paid are largely based on operating profit. What better way to manipulate profit than to build it through false inventory (inventory that is inflated by quantity or even by adding burden). After all, you are the only one who understands how the numbers came to be what they are. After further investigation, we have determined that the inventory adjustment for the prior year is in the complete opposite direction as to the five before, and in a significantly higher dollar range. I am not making accusations, simply observations.
One of the components of the cost model that we constantly emphasize is transparency. If EVERYONE does not understand where the numbers are coming from, then they cannot possibly make a judgment call whether they are right or wrong. It is not reasonable for management to try and review massive spreadsheets with formulas that reference many different cells and calculations. They cannot be follow unless they are the preparer. Hence, reveals the opportunity for fraud. Heck, when I sat across the desk and listened to this individual speak, he was very convincing. He sounded like he knew what he was talking about and on the surface, the calculations appeared logical.
In all the years I have been doing this, I have never encountered this situation, but it has brought a new reality to light. Cost accountants are by far in a world of “exclusivity,” meaning that most people within the organization do not follow or understand what they do. If you own a small company, and that individual who is doing costing also has other responsibilities such as posting general journal entries, closing the period, bonus calculations, or writing checks, or works closely with someone who does, it might be time for you to take a closer look at what is going on.
Categories: Cost Accounting