http://findarticles.com/p/articles/mi_m4325/is_n12_v39/ai_n25022759/?tag=content;col1
Summary:
Based on media reports, the number of failures involving inventory fraud detection has increased over past years. A possible reason could be the current economic slump, which caused businesses' financial conditions to deteriorate. This article is to re-energize auditors and review previous cases of inventory fraud. McKensson and Robbins drug wholesale reported a prosperous financial period with sizable amounts of sales, but in reality their inventory was overstated by $10 million dollars. Prior to 1940, auditors accepted written notifications from management instead of source documents in relation to the accounts receivable ledger and inventory amounts. During this time auditors claimed they were not qualified to measure their client's inventory. The Securities and Exchange Commission (SEC) concluded that auditors were negligent to notice the large discrepancies between the reported and actual gross amounts. The SEC later recommended that auditors refer to source documents independent to management to determine the accuracy of the accounts receivable and balance sheets. This practice of observing the inventory count seemed to have diminished the problem of inventory fraud over the past 50 years. Auditors can focus more on other concerns such as computer fraud, financial disclosure and auditors' legal liability.
Connections:
This article describes the importance of inventory as well as the accounts receivable ledger in merchandising business as well as how these figures can easily change the financial standpoint of merchandising businesses. The inventory mentioned in the article is directly connected with profits and with large reserves of inventory it usually demonstrates that the business is doing well and is able to sell off a profitable amount of merchandise within a reasonable amount of time to be able to afford to keep replenishing inventory reserves. The accounts receivable ledger is another thing that can determine whether or not the business is actually profitable. The more accounts and the value of each account within the accounts receivable ledger is usually a healthy sign of prosperous business.
Reflections:
Businesses usually engage in inventory fraud if they're trying to lure in potential investors by displaying that their business is healthy and profitable during this crucial time of recession as stated in the article. It's important for merchandising businesses to appear reliable to be able to obtain purchaser and investors to make profits and progress. Another reason is that businesses that are actually profitable want to evade taxes and embezzle a larger amount of profits. I can understand their need to appear reliable to obtain purchasers and investors, but in the end it's just a scam and I think that it's highly doubtful that a business that was doing poorly before can revive themselves with this scam. Also there are major consequences for engaging in this and the gamble not worth the risk.
