Inventory Misappropriations Fraud Examination 499696

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Inventory MisappropriationsFraud Examination
499/696

• Speaker
• Jason Olson
• March 31, 2003

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Inventory Misappropriations

• Definition misuse or theft of inventory from a
  business
• Covers misuses such as an employee borrowing a
  stapler for a night to employees stealing
  millions in inventory

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Inventory Susceptible to Fraud

• Most of the time the inventory is high in value
• The inventory is usually small and easy to
  transport
• High in demand easy to convert to cash

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Inventory Other Asset SchemesComparison of
Median Losses( Occupational Fraud and Abuse p.
311)

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Inventory Theft Schemes

• Stealing Inventory or Scrap (Larceny Schemes)
• - Fake Sale (Accomplice needed)
• Asset Requisitions and Transfers
• Purchasing and Receiving Schemes
• - Falsifying Incoming Shipments
• False Shipments of Inventory and Other Assets

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Stealing Inventory or Scrap(Larceny Scheme)

• Basic theft of inventory (Easiest Scheme)
• Employee steals inventory from employer without
  trying to conceal it in the books or records
• Theft could be new items or scrapped items
• Fake Sale Scheme (no sale entered in till)
• Not a complicated theft

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Asset Requisitions and Transfers

• Involves fraudster taking the inventory during
  the requisition process for an item
• Hard to conceal due to the fraudster being the
  one who orders the request of products, is the
  primary suspect
• Theft by this scheme becomes easier when there
  are 2 or more physical locations in which the
  transfer occurs

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Purchasing and Receiving Schemes

• Involves the fraudster being able to order excess
  inventory
• Falsifying Incoming Shipments
• - Fraudster tries to conceal theft of inventory
  by marking shipment as short
• - Hard to conceal due to Vendors request for
  full payment

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False Shipments of Inventory and Other Assets

• Fraudster tries to conceal missing inventory by
  creating a sale
• Involves manipulation of documents for the
  fraudster to conceal this theft

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Concealment of Inventory Misappropriations

• Shrinkage is the most difficult issue the
  fraudster must wrestle with
• This is due to shrinkage being a signal for fraud
• A large amount of shrinkage for a business is a
  BIG RED FLAG

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How Can a Fraudster Conceal Shrinkage?

• Alter Inventory Records
• - manipulate either perpetual inventory records
  to match physical count or vice versa
• Fictitious Sales and Accounts Receivable
• - charge sale to a large account or an old
  account that will be written off soon
• Physical Padding
• - fraudster tries to make it look like there is
  more inventory than their actually is

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Inventory Misappropriations Case(Occupational
Fraud and Abuse p. 305-309)

• 19 yr old Larry Gunter worked as a shipping clerk
  in a computer manufacturers warehouse
• The company produced microprocessor chips which
  were worth 40 a piece
• Since these chips are so small they were packaged
  in a box with about one thousand in every box
• Gunter knew they were worth something but didnt
  know how much until he brought one home to be
  analyzed by his girlfriends father, Grant
  Thurman
• After Gunter found out that he could make money
  by stealing these chips and selling them to his
  girlfriends father, he decided to steal more
• Gunter was able to steal these chips when he was
  transferring the inventory from one building to
  another while making a pit stop to his car in the
  parking lot to drop off some the goods
• Gunter told his friend and coworker Larry Spelber
  about his theft plans and they decided to try to
  steal enough inventory so that they wouldnt have
  to work anymore and could finance their schooling

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Inventory Misappropriations Case(Occupations
Fraud and Abuse p. 305-309)

• Unknown to Gunter and Spelber, the company had
  hired Lee Roberts, a private investigator and
  fraud examiner
• The company knew they were losing inventory but
  did not know why
• The company listened to Lees request for more
  surveillance cameras
• Lee realized the major flaw with the handling of
  the inventory was that employees had to move the
  items between 2 buildings on a cart with no
  internal paperwork
• This everyday activity was left unchecked by the
  security guards as well
• Gunter and Spelber were caught in the act by the
  video cameras

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Inventory Misappropriations Case(Occupations
Fraud and Abuse p. 305-309)

• Gunter and Spelber admitted their guilt and
  identified Thurman as the receiver of the stolen
  goods
• Thurman denied knowing that the goods were stolen
  but admitted to selling them to an acquaintance
  named Marty
• Thurman and Gunter both served over a year in the
  state pen for grand theft and embezzlement
• Spelber got nine months in a work furlough
  program
• Marty was never convicted due to lack of evidence
• It is believed to be that some of the stolen
  parts were resold to federal agencies
• This was the largest internal theft in the
  history of California county
  Over 1 Million.

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Fraud Triangle

• Pressure payoff school? quit working?
• Rationalization not paid enough?
• Opportunity Gunter was a shipping clerk and was
  involved with moving the inventory between the
  two locations

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RED FLAGS

• Abnormal shrinkage
• Unusual adjustments made to perpetual inventory
  account
• Abnormal amount of short shipments
• Vendor complaints
• Unauthorized write offs on an account receivable
• Abnormal amount of scrapped items
• Missing documents (shipping and receiving
  reports)
• Abnormal employee behavior during the
  transferring of goods between 2 different
  locations
• Unexplained out of stock conditions
• Major decrease in gross margins
• Unexplained increases in cost of goods sold

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Detecting Inventory Misappropriations

• Statistical sampling
• - allows fraud examiner to look for key
  attributes on documents
• Increases/Decreases in perpetual inventory
  without proper documentation
• Shipping documents
• -all sales have proper documentation
• Physical inventory counts
• Analytical review
• Audit Programs

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Prevention

• Proper Documentation
• Proper Segregation of Duties
• Independent Checks
• Physical Safeguards

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Who Has the First Question?
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Bibliography

• Getzoff, Stephen N. Twenty Ways to Detect Fraud.
  Business Fraud Detection Service. Online. 29
  Mar. 2003. lthttp//getzoff.com/business_fraud/20_q
  uestions.htmgt
• Wells, Joseph T. Occupational Fraud and Abuse.
  Obsidian Publishing Company, Inc. 1997