Keeping Your Employees Honest

December 31st, 2011 BY Claire Moore

How to spot and prevent employee theft

sherlock-holmes-147255_640Do you find that you keep having to purchase inventory more often than sales would dictate?
Has your cost of goods sold increased more than sales have?
Do your customers complain that their shipments are short?

If so, then your employees may be using your inventory to stock their own private enterprise. Disgruntled employees have all kinds of way of getting back at you. Theft is one of the worst. If your business involves inventory, then you need to be aware of the many ways that employees can drain your profits by stealing your inventory.

Inventory counts — Do you?

How often do you take a physical count of your inventory? Even if you do a regular counting, be aware that the person doing the count may be the one stealing from you. Numbers can be fudged to cover their tracks in the Inventory and Cost of Goods Sold accounts. So, if your Cost of Goods Sold account seems to be growing in a larger proportion than your sales, then look at your procedures for storing and counting the inventory.

Another way to spot theft of inventory is to keep an eye on your Accounts Receivable subsidiary accounts. Sometimes an employee creates bogus sales and ships to an accomplice. The sales may be charged to a fake Accounts Receivable account or to one that is so large that another charge won’t be questioned. Or else they post to a receivable that’s about to be written off as uncollectable.

Do you write off inventory that’s damaged or outdated? If so, then think about doing a periodic review of your procedures for completing the write-off. Inventory that’s been written off as damaged may actually be stolen by the employee doing the write-off.

What can you do?

Create written procedures for maintaining your inventory. Make sure that there’s a paper trail that goes from the purchase order through receiving, tagging, sales and shipping to the collection of money on accounts. You should be able to match up shipping documents with sales invoices and investigate where a match can’t be found. Also review the paperwork related to the payments for inventories to make sure that you’re paying for inventory that actually went into your warehouse and onto your shelves.

Establish a system for identifying and counting your inventory. This might involve creating a numbering system so that each classification of item has its own unique identifier. In this way, the more expensive Widget 1A1 can be distinguished from the Widget 2B2 which has fewer features and sells for less. That way your employees won’t be able fudge inventory counts by using the less expensive models to count as if they are the more expensive ones that he stole.

Separate duties. Even better is the requirement that counting duties be separated so that the employee doing the counting is separate from the employee who keeps the records. Make sure that inventory counts happen without notice so that boxes can’t be rearranged to cover up theft. After the count, you might have a different person do a recount and check to see if their figures match up. Merchandise recounts are especially helpful regarding inventory with a high value. Break up the tasks involved in ordering, receiving, storing, disbursing, scraping, and counting your inventory. Have different people performs each task. With so many people involved in handling the inventory theft will become less likely.

Restrict access. Finally, do what you can to restrict access to the inventory. Not all of your employees need to have keys. Most don’t need to be working unsupervised after hours. Always make sure that a supervisor is present. Think about installing surveillance equipment and use it.

Review the accounts. Periodically have your accountant review the sales and cost of goods sold accounts. Look for discrepancies in how they’ve changed from last month and last year and how they’ve changed in relation to each other. Calculate your gross margin percent (Net Sales minus Cost of Goods Sold divided by Net Sales) and compare it to previous periods. Check your inventory turnover rate(Cost of Goods Sold divided by Average Dollar Value of Inventory On-hand) to look for unexplained changes.

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Keeping Your Employees Honest / Small Business Bookkeeping Network by is licensed under a