SHRINKAGE: BOTTOMLESS PIT OR GRAVE?
Many organizations just write off losses â€“ especially raw materials and finished goods â€“ to shrinkage: a general ledger bucket of seemingly endless depth and widespread use for all sorts of ills that may plague an organization. As long as shrinkage is within some acceptable percentage range, no one typically gives it too much thought or care.
If the â€œacceptableâ€ shrinkage range is arbitrary, i.e. not based on industry standards or market studies, this may be the initial indication of the attempt to cover up fraud.
One problem, therefore, is that all the root causes of the shrinkage are not investigated. Certainly, human error â€“ honest mistakes â€“ will be partially to blame. And while technologies such as barcode scanning and radio frequency identification (RFID), especially when coupled with effective business processes and employee reward programs, can help to reduce the effects of human error, they cannot be expected to fully eradicate error or fraud.
Shrinkage is mostly thought of as due to theft, but the fraud of theft can take many forms and represent different internal and external collusion scenarios between the organization and its customers and suppliers. While no fraud investigation should presume guilt, the root-cause analysis as to the reasons for the inventory shrinkage should include the possibilities of uncovering fraud. As such, having just organization employees conduct such an investigation may be like asking the fox to guard the proverbial hen house.
The affects of inventory shrinkage include:
– Inaccurate inventory counts
– Finished Goods not available to fill sales orders
– Raw Materials not available for manufacturing
Other articles in this series:
Guest Author: Norman Katz
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