Back in the early days of my time as an auditor, I went on many inventory counts. Because companies would have to close their businesses while the inventory count was going on, they tended to happen over the weekend. I am yet to meet anyone who likes to spend their weekends at work and it is even worse when all of your friends are going to be sleeping in or doing something fun while you are at work. I could complain (and I am sure I did) but it was a necessary part of the work that I did and so I spent several weekends at a client, observing their inventory counts and carrying out audit tests. One particular assignment sticks in my head. I went to a company that had a very large inventory of bags of cement. I cannot, for the life of me, remember what the company did – whether it was construction or the manufacture and sale of cement. Either way, there was a huge warehouse, filled with stacks of these bags. I don’t know how much you know about cement but, what I found out that day is that cement is very powdery and the small particles are very good at escaping the bags that they are put into. You could see the air in the warehouse; it looked a little like the inside of a snow globe, except for the fact that no one would ever make a snow globe of mountains of brown bags. One of my tests involved test counting areas of inventory to see if my numbers tied up with the numbers counted by the client. I walked around sections of the warehouse and counted stacks of bags – the length, breadth and height – and multiplied numbers to come up with totals. I was not done though. I had to make sure that the mountains were made up of cement bags all the way through and not, say, hollow in the middle. So, I climbed up the dusty stacks of bags, fighting my fear of heights in the name of my mission, and checked to make sure that the stacks were not hollow. I then also had some of the staff at the company move some bags around to make sure that the stacks were made up of only cement bags and not bags of some other filler. I went home that day coated in a film of cement dust. I know my neighbors were wondering how an auditor could get so dirty at work – didn’t I just work with a calculator and pen? Ink stains were expected, but not cement. For all the complaining that I did about spending my Saturdays on inventory counts, I found a lot of the assignments, like this one, to be a lot of fun and rather exciting. I got to be queen of the cement mountains and bound about, on high, in the name of thoroughness.
If you have a company that sells or makes any kind of stuff, you will have inventory, which is also called stock. In accounting lingo, inventory is considered to be an asset because it is something that is expected to make you money in the future. For the very reason that inventory is expected to make you money in the future, it is important, for the health of your company, to safeguard your inventory, so that someone else doesn’t make off with it and, thus, your future money. I have spoken many times about many ways to prevent fraud and error with financial statements, but a lot of these steps can be translated into making sure that you hold on to your stuff.
In the world of inventory, your stuff disappearing is referred to as shrinkage. It makes it sound like you didn’t follow the instructions for laundering clothing, but it basically means that someone is stealing from you and, I don’t know about you, but I don’t like it when people steal my stuff. Any advice I can take to keep that from happening is good advice to me. The first step, in order to protect your inventory, is to keep it locked up. I have told you before about the steps my husband took to install physical barriers to access to his belongings in his studio. These are the types of steps that you should take in physically safeguarding your inventory, your stuff. Depending on what you have and what your needs are, the physical safeguarding may be locks, cameras, doors with security codes or even those fancy retina scanners that we see on crime shows. You should not only keep your inventory under lock and key but also limit access to the inventory to a few authorized parties. Only people with a reason to get to the inventory should have access. This makes it easier to trace the movements of inventory and it also serves as a deterrent to those who might think about pilfering inventory. If the list of suspects is a short one, those people might think twice about stealing.
The segregation of duties is also vital with inventory. The cycle of inventory begins with its purchase. Inventory is then stored until it is needed for manufacture or sale. Sometimes inventory is damaged, expires or is otherwise no longer of value to you and your company. When this happens, the inventory is either destroyed or sold, at a loss, to someone else who still finds it useful. Now, if one person has control over this process, from purchase to sale or destruction, there are many opportunities for fraud. For example, a person may take inventory, sell it for a profit and then write off that inventory as obsolete, pocketing the money made from the sale. Another example of fraud is ordering and receiving, say, ten items, but claiming that only nine were received. This person can then take the tenth item for personal use or profit.
Another very useful and important control is the use of preprinted, prenumbered documentation. These documents range from order forms, to receiving reports and shipping reports. All movement of inventory coming in and going out must be documented and those documents must be prenumbered. Gaps in the document numbering, or repeated numbers, will raise red flags that should be investigated. Missing documents should also raise red flags that should be investigated.
Inventory is your company’s stuff and it is important to seek out the advice and guidance of qualified CPAs to best protect it. Doing so dissuades potential criminals from trying to take it and also will make it easier to track it down, should someone take it. Taking the time to adequately plan and incorporate these controls into your inventory system can protect you from loss. I know I get worked up about people messing with my stuff and I am pretty sure you feel the same about the stuff that helps your business run.