Advanced Inventory Concepts

A company files a claim contending a warehouse manager stole $450,000.00 in inventory. The manager, a long-time employee, was trusted with keys and alarm codes. He was able to enter the warehouse after hours and remove pallets of product. The company contends the theft occurred over a 12-year period.

When confronted with an inventory loss claim, what do we do to test the reasonableness of missing inventory?

The Rate of Theft

A common, core concept involves evaluating an employee’s theft over a period of time. The frequency and severity of the rate of theft and amount of theft increases over time. Our analysis includes the following basic premises:

  1. Employees do not initially steal at the onset of their employment.
  2. Employee theft often starts with an error or with taking a small amount.
  3. Employees may realize the error or small amount was not noticed by management.
  4. Employees continue to steal in small amounts.
  5. As employees become addicted to the extra monies, the amount stolen increases in frequency and severity.
  6. The frequency and severity continue to increase until the employee theft is discovered.
  7. Sometimes employees want to be discovered. They could have quit stealing and their theft would not have been discovered.
  8. The day and week of discovery probably represents the greatest severity of theft by the employee in a particular period.

Verifying the Reasonableness

There are a multitude of ways to verify the reasonableness of the amount of theft. One way is based on the Triangulation Method.

The concept of the Triangulation Method is measuring the amount of misappropriated inventory or monies when there is a lack of alternative information and alternative variables. The rate of increase in frequency and severity is similar to the area of a triangle. Based on the variables of the triangle, the amount of theft can be tested for reasonableness.  A triangle consists of base times height at 1/2.

The base represents the period of time. The periods can be days, weeks, months, or years.

The height represents the amount stolen in a period, which is equivalent to the units of time utilized in the decided base line.

Putting the Method to Work

For example, an employee is seen on video at a gas station stealing lottery tickets. The employee is caught with 100 lottery tickets in the last week of employment. The employee worked for 30 weeks. We want to measure the period of theft in weeks. The units in the height and base need to be equivalent.

The triangulation is depicted as follows:

The employee is assumed to start at stealing zero tickets when employed and continues increasing the number of tickets stolen. The calculation amount stolen is the area of the triangle, thereby utilizing the triangulation method:

½ (Base x Height) = ½ (30 x 100) = $1,500.00

Utilizing the basic geometry concepts of the area of a triangle, an alternative method can be used to estimate the amount of monies or inventory missing.

 

 

 

DM Studler
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About the Author

DM Studler

DM Studler, M.Acc., CPA, CFF is the founder of SDC CPAs, LLC. and has worked employee dishonesty claims in excess of $82,000,000, both domestic and internationally. She speaks across the country on a regular basis and is highly esteemed among her colleagues.