Inventory thefts at warehouses and distribution centers are often inside jobs from disgruntled or opportunistic employees who take advantage of a company’s internal control weaknesses. Perhaps these employees realized that the warehouse’s security cameras are not all functioning or are infrequently reviewed, if at all. Or the perpetrators collude with other employees to remove valuable merchandise from the warehouse at off-hours such as nights and on weekends.

Thefts are typically discovered during routine inventory or cycle counts long after the actual robbery.  In other instances, theft is discovered after employees return to work on Monday to find that the security system was tampered with and the warehouse was broken into.

According to the 2020 ACFE Report to the Nations[1], the average loss for an asset misappropriation in the warehousing/inventory department is $85,000. These theft losses, better known as larceny, is the removal of inventory from the warehouses without any attempt to conceal the theft of the books and records.

How Warehouses and Distribution Centers should Document Theft Loss

A company should document a theft loss as follows: First, company personnel should walk through the warehouse and review security tapes to determine what inventory items may have been stolen. Second, a full inventory count beginning with high-value inventory items should be taken. If the theft was an inside job, the perpetrators would know precisely where to find these high-value items. Third, warehouse employee personnel files should be reviewed to determine recent layoffs, recent job changes, or poor performance reviews. Interviews of employees should be taken to gain insight into anything unusual that other employees may have observed at the warehouse leading to the theft or the detect suspicious behavior during the interview.

The company would compare the inventory count with the perpetual inventory count to determine the items stolen and prepare a variance analysis between the physical inventory count with the last physical inventory or cycle count of inventory items. Normal shrinkage should be accounted for to better estimate the amount of theft. Shrinkage typically occurs due to theft (usually minor), inventory damage, and errors in the accounting records. We frequently see companies attempt to include all inventory items in the variance analysis as part of the theft though, shrinkage occurs in the normal course of business.

Though companies may be reluctant to report these thefts for fear of bad press, companies should notify the police, and a police report filed to document the incident. This step can help send a message of the seriousness of the matter to other warehouse employees and serve as a preventative control.

Lastly, if the theft is covered under an insurance policy, document the theft, including the timeline of events leading to the discovery of the robbery, the actions taken by the company to estimate the theft, and the internal control/corrective actions taken by the company to prevent a similar occurrence from taking place again. Note that the insurance carriers may retain their team of forensic accountants to review and provide their findings on the theft, which will include the forensic accountants’ observation of yet another inventory count and asking questions to the company regarding physical inventory and cycle counts, shrinkage, internal controls in various calls and meetings with the company’s management.

[1] The 2020 Report to the Nations is based on the results of the ACFE 2019 Global Fraud Survey, an online survey of Certified Fraud Examiners conducted from July 2019 to September 2019. The ACFE is the world’s largest anti-fraud organization and premier provider of anti-fraud training education and certification.

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