Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Protecting Your Inventory and Customers from Employees

During the last year, I have received more phone calls than usual from business owners who believe employees are stealing inventory from them. Many of the concerns I hear from small business owners fall into two categories. The first scenario is the extremely popular and growing internet business, in which entrepreneurs keep inventory in warehouses, garages, and other storage spaces to fulfill orders. Often, they find that tracking and managing their inventory is difficult. As a result, they may not have the expected inventory on hand to fulfil orders, resulting in customer dissatisfaction and lower profits.

The second scenario is not a new problem; however, due to the economic impact on the construction and service trades, business owners are taking a stronger stance relating to their employees and subcontractors performing side jobs for their customers, and possibly using company inventory and resources. Companies invest funds and resources into getting leads and customers. Employees and subcontractors who go out on calls and have customer contact may cut the business out of the loop and perform the job for less on the side.

Following are some suggestions of policies and controls that may reduce employee theft of inventory and the occurrence of employees using company resources to perform side jobs:

  • Show your employees that you treat your inventory like money. Employees may not realize the value of your stock inventory. Often, employees who would never think of taking money out of the cash register have no qualms about “borrowing” inventory. By installing proper controls, you can help your employees appreciate the true value of inventory.
  • Security cameras and other theft-deterrent devices are not as expensive and difficult to install as they once were. Although, an employee who is truly a thief can often get around these systems, it is an effective deterrence for many employees.
  • Physically counting inventory on hand and comparing it to internal inventory records is extremely important. Nowadays, many small companies rely on electronic systems to manage their inventory. However, while computer software programs to manage inventory are efficient and useful, they can also be manipulated to hide fraud. Nothing can replace physical inventory counts. In addition, these counts will act as a psychological deterrent, especially if you conduct them on a random basis.
  • Reduce the people who have access to your warehouse and inventory storage areas. Oftentimes, salespeople, vendors, drivers, and subcontractors all have access, which can lead to more inventory shortage.
  • Oftentimes, inventory is removed, which is not invoiced (or sold), in order to make a sales call, provide samples or for an emergency situation. Implement a tool that allows salespeople and drivers to easily record material they remove, which could be as simple as a clip-board hanging on the door. Management/owners should review these regularly. It is often surprising how many “samples” are removed and never returned.
  • Pay your employees fairly and create a work environment where employees feel valued to reduce the incentive to steal or take side jobs. Communicate to your employees that inventory generates revenues and increases the bottom line, which will result in better pay and benefits.
  • Your employee manual should clearly explain the company’s policy on performing side work. For example, it may state that any request by a client for the employee to work on any job other than those contracted for by the company must be reported to the company immediately, or it may be a termination offense.
  • Your subcontractor agreement should also state that the subcontractor should not talk to the customer about any other work. Again, they should report all such requests directly to you immediately. It should be a termination offense if they are caught doing such work.
  • Many employees have use of a company truck and cell phone during work and non-work hours. GPS vehicle and cell phone tracking systems are becoming more popular to determine whether employees are performing work for customers during non-work hours, and to match up locations with time billing sheets. However, due to concerns over employee privacy, employers need to ensure that any tracking or electronic surveillance is legal.
  • Review the corporation commission websites to determine if employees have set up companies with a similar name or offering the same services.
  • Follow up with customers or sales leads to potentially uncover instances of employees performing side work. Sometimes, the customer is under the impression that the company is performing the work, and is surprised to hear that the work will not be covered or warrantied, because the employee actually performed the work on the side.

By Julia Allen Miessner, CPA, CFF, CGMA