Employee theft of inventory and supplies, and the unauthorized use of equipment, although not as frequent as cash theft, can be a major loss for many small businesses. In some cases, a non-employee accomplice may be involved, including a dishonest vendor.
Although cash is the preferred target for employee theft, supplies, inventory and all sorts of equipment are tempting as well. These frauds range from a box of paper clips to the unauthorized use (or outright theft) of expensive furniture and/or equipment.
The following are common types of employee misconduct relating to non-cash assets:
- Unauthorized use of equipment. The company truck would sure make it easier and cheaper to move my mother-in-law this weekend. I don't think anyone would mind, do you? I'm a good driver so no damage will come to it. No, I'm not on the company vehicle insurance and mine lapsed last month, but I'll be real careful. (Hmmm! How much does a negligent homicide cost these days????)
- Inventory shrinkage. Remember the old joke about the guy who pushed an empty wheelbarrow out of the factory every day for a month. Then he was fired. The security guard was called on the carpet for letting inventory theft happen. He said he checked each time the miscreant punched out and saw nothing whatsoever being sneaked out of the plant in the wheelbarrow. "What was he stealing?" the baffled guard asked. "Wheelbarrows, you dummy!"
- Fake sales and/or purchases. Those same wheelbarrows could be "sold" to a fake customer landscaping company with a phony purchase order and invoice, and shipped right out of the warehouse to a storage facility the fraudster employee rented to receive them.
Unauthorized use of equipment can cause major losses
Employee unauthorized use of equipment can be a major loss for many small businesses.
The fraud: How about that great snowblower the company bought to clear sidewalks and parking for customers! Employee Joe Schmo decided it was better to "borrow" the boss's new tool to do his own driveway than to buy or rent one of his own.
While doing his driveway, his neighbors wanted to hire him to do theirs as well. Why not? So Joe, the budding entrepreneur, ran that thing all weekend, using up all the fuel and eventually breaking the machine. There was no way the boss could clear the sidewalk and parking for his business Monday morning as he couldn't get that new snowblower started.
The flaw: Trusting employees. Leaving keys or easy access to valuable equipment. No formal policy stated or enforced.
The fix: Set strict policies and limits for employees and enforce them. Physically secure valuable equipment. Trust . . . but verify!
Employees may not only misuse your business equipment but may make your assets fraudulently "disappear."
Inventory shrinkage can be reduced
Dealing with employee theft of inventory, supplies and equipment can be an on-going struggle, depending on the type of workers and turnover present in your workforce.
The fraud: Inventory can shrink due to plain old larceny, phony receiving reports, and unauthorized write-offs of old (and fake) accounts receivable.
The flaw: Depending on the industry you're in, there is bound to be some natural shrinkage in inventories over time due to minor errors of one sort or another. But large discrepancies are almost always due to fraud. Even during a physical count, a fraudster employee can use empty boxes, etc., to fool an auditor into thinking there are more units on the shelf than there actually are.
The fix: As with other types of employee fraud, a formal policy of separation of duties, strict supervision, voucher accounting and all relevant internal controls must exist and be enforced at all times.
Physical counts should be frequent, sometimes on a surprise basis, and thorough. Nothing should be taken for granted.
Reconciling shipment records with sales invoices periodically is a good way to test inventory. Frequent inspection of the perpetual inventory records is a must. Analysis of financial statements to mine for margins, turnover rates, increases in costs of goods sold and delinquent receivables should be done monthly.
Another type of employee fraud is committed through fake sales or purchases and often requires the assistance of an outside accomplice.
Protect against fake sales and/or purchases
Fake sales made by fraudster employees may go to a phony customer or a real one who is an accomplice.
The fraud: The wheelbarrows (from our previous examples) could be "sold" to a fake landscaping company with a phony purchase order and invoice, and shipped right out of the warehouse to a storage facility the fraudster employee rented to receive them. The goods can later be sold for cash, the invoice voided, and the inventory record doctored. Or they could be shipped to a real landscaper who colludes with the crooked employee and pays him a bounty for the stolen goods. Or the crooked employee might be the accounts receivable bookkeeper, who could make the charge to the landscaper disappear from the books, or maybe even have him "return" the goods for a refund!
Or, perhaps an employee is in a unique position to manipulate purchasing and receiving systems. Say this employee received a delivery of 100 wheelbarrows. He decides to cover up his planned theft of 10. So he logs 90 items on the receiving copy of the delivery papers (that go to the inventory clerk) and sends the payment copy to the bookkeeper showing 100 were received.
The flaw: As is commonly the cause when it comes to fraud, the reason these frauds happen is attributable to the lack of separation of duties, lack of supervision and lack of overall internal controls.
The fix: It bears repeating that a formal policy of separation of duties, strict supervision, voucher accounting and all relevant internal controls must exist and be enforced at all times.