Prevent Inventory Fraud

Today, businesses have to develop and implement effective stock policies to maximize their profits by minimizing their costs against current market conditions. Only production is not enough in the face of constantly changing competitive environment which is difficult to keeping under the control. Increasing diversity in products makes inventory control and management difficult and complicated. The quality, speed, reduced cost, efficiency and customer satisfaction factors have become even more important. Businesses need more information and communication in order to develop business processes with the pressure of these factors.

Inventory fraud falls under a non-cash fraud class. As small as a cosmetics retail employee stealing a small lipstick from their own store or as complex as a production manager selling company-owned raw materials to a third party. Unfortunately, the current COVID-19 situation is new to inventory fraud. For example, having fewer employees on-site is likely to reduce the level of oversight, which could make it easier for an employee to commit fraud.

Needless to say, inventory fraud could be devastating to your business, and now is not the time to let down your guard. Here are some ways to prevent it.

The issue that should be considered for every business is the work to be done on the prevention of fraud. Since this step will be created before fraud has occurred, it takes a more important role in the events. It is more difficult, troublesome and costly to reveal the fraud after it has occurred. It is imperative that the "Opportunity" leg in the action should be taken under control.

1. Set proper segregation of duties.

Segregation of duties is one of the most basic fraud-prevention measures you can take. Simply put, “segregation of duties” means you don’t allow one person to be involved in two processes that have a conflict of interest. For example, never put the same employee, no matter how trusted, in charge of both production and shipping.

2. Make use of inventory management system.

You can take advantage of inventory management systems to detect and prevent inventory theft. So, what is an inventory management system or inventory control system? This system is the combination of technologies used to manage inventory. The tech includes barcode labels and scanners, inventory management software that provides a database for all the goods in inventory, and generates reports and processes for labelling and documentation of goods.

3. Maintain accounts accurately.

The inventory count should be accurate on paper. The exact number of items that have arrived should be counted before being stacked. When inventory goes out into production or to the customer, it should be counted. All the details should be entered into the inventory management system quickly. Accurate accounting can help you find discrepancies in inventory and detect fraud in time.

4. Incorporate the element of surprise.

Incorporating the element of surprise into your internal controls creates a threat of detection—an excellent fraud deterrent. For instance, consider conducting surprise stock counts or doing an unannounced shipping audit. If employees know you could show up at any minute, they will be less likely to engage in fraudulent behavior. What’s more, if fraud were to be in progress, your surprise action could potentially detect it.

5. Conduct a production yield analysis.

As I’ve said before, data analytics is a powerful tool for detecting and preventing fraud. Data analysis goes a long way in detecting fraud. The difference between expected output and actual output is called production yield. Given the number of raw materials, labor, and time taken, you can find out how much the resulting output is. If the difference between expected and actual output is too much, someone might be committing inventory fraud in your company. Data is your biggest weapon in the fight to tackle inventory fraud.

6. Eliminate simple frauds.

Companies can work on eliminating simple frauds by following simple steps such as checking belongings before employees leave. This simple policy can save companies a lot of money in the long run. One advantage of this policy is that employees would not commit simple frauds in the first place because they know their belongings will be checked before they leave. Simple frauds can be easy to miss. Factory and warehouse managers need to be active to prevent them.

Don’t let inventory fraud impact your business.