Fraud - Monitor Your Inventory

In this third installment of our Fraud series, former federal special agent and supervisor Scott Rebein of SFR Consulting & Advisory highlights the importance of properly monitoring and protecting your inventory. Though the loss of office supplies such as notepads and pencils might seem negligible, those costs can quickly add up to thousands of dollars missing at the end of the year.

Fraud in business can take many forms, not just theft of money and time, but also your inventory of products. Such theft is often assisted or even perpetrated by an insider, and lack of internal and physical security controls opens the opportunity for these entrepreneurial fraudsters.

To protect against this type of fraud, employers need to take the time to design thorough internal and physical controls to protect against these unnecessary losses. Without such controls, inventory can easily fall between the cracks or be exploited by unscrupulous workers, as evidenced by these two examples from the field.

An Example in Security: Company Printer Cartridges

An employee in a large IT department noticed that the internal controls on securing and accounting for laser printer cartridges were lax. The department considered each cartridge as “disposable” office supplies, no different than pens and pads of paper. As a result, hundreds of cartridges were stored in an unlocked room with the rest of the office supplies, allowing anyone, including employees from other departments, access to the space.

The employee, sensing an opportunity in these printer cartridges, was able to remove nearly one cartridge per day, freely placing it into his backpack and walking out of the building.

It wasn’t until an inspector general audit that it was discovered the IT department had increased the number of laser print cartridges purchased by over 300 per year without a commensurate increase in the number of printers or paper used. The inspector general also noticed the complete lack of security and internal controls over these cartridges, the loss of which ultimately cost the company over $200 each.

The employee, who made $112,000 over three years from his illegal behavior, was soon after caught, fired, and prosecuted.

An Example in Vigilance: Internal Blackmail

A successful clothing manufacturing company found recurring loss events occurring at their store. Even though their warehouse was outfitted with security cameras and was properly secured at night, the store continued to document missing inventory. Strangely, little evidence was available to suggest foul play, including no indication of theft from the security cameras.

After the sixth consecutive month of theft, the store began to suspect a more organized assault on their wares. It was soon determined that an employee was being blackmailed by several individuals who discovered he was cheating on his wife.

The culprits blackmailed the employee into assisting with their thefts. As part of the heist, the employee would set aside wanted merchandise, blur out security camera lenses, and remove camera tape recordings of any wrongdoings. Only after the owner of the store personally replaced the camera tape – and found it to be missing the very next day – was the inside job detected.

Upon review, the dollar loss to the company was approximately $100,000, but lost profits amounted to over $500,000.

Properly designing and implementing comprehensive internal controls could have prevented the loss of significant income in both cases. At SFR Consulting & Advisory, we provide proactive investigative services, and proactive internal controls design, implantation, training, assessment, and periodic monitoring, among other investigative services. Having an outside, independent company with complex, financial fraud detecting experience can assist in identifying employees’ waste, fraud, and abuse of company policies, procedures, and inventory.

Don’t become a victim of fraud. If you suspect, detect, or want to protect against fraud, it’s not too late to contact SFR Consulting & Advisory at: www.specialtyfinancialresources.com. You can reach Scott Rebein at: scott@specialtyfinancialresources.com.