Warehouse Fraud

May 13, 2021

By Y.C Yau

It's not money-game or MLM...

One of the most common form of fraud in Malaysia is warehouse fraud. Although many of these schemes may seem simple, but it is often the simple stuff which goes on undetected.

Movement in the warehouse is grossly simplified as follow: Goods are delivered by suppliers, stay on the shelf until they are used, sent to customers, and sometimes they may be sent back, fixed and sent again to customers or returned to suppliers. Each point of movement is a potential area for fraud to occur.

THE RECEIVERS

Receiving fraud: If your supplier sends goods without a proper delivery order, your warehouse staff may take note of that. Skimming a few quantities of what you are selling may seem like a good idea to them. Your perpetual stock records would be slightly higher than the actual stock balances, and these could only be uncovered upon an inventory count being carried out.

The lifecycle of the fraud can be further prolonged if your warehouse staff are aware of ways to circumvent an actual count, for example fixing the meter showing the actual inventory balance for goods that are not easily viewable, e.g. grain stored in silos or liquids stored in a tank.

While inventory remain on the shelf, fraud can be carried out by manipulating ways which stock are conventionally removed. The most two common ways are missing and damaged inventory. When inventory counts are carried out, if missing inventory is an issue that is not seriously taken care of, for example punishment to the person responsible for the last location it was missing, then warehouse staff know there is no major repercussion, so they would just report a lower actual quantity and leave take the purported missing inventory.

THE “SCRAP ARTIST”

For industries that rely on heavy metals, some warehouse staff may be motivated to report goods as damaged and later sell these as scraps. Certain warehouse which contains inventory with a very high market value due to its’ controlled nature, e.g. drugs, would also have a high occurrence of theft.

Companies who do not practice three-way matching are also at risk of inventory fraud. Fictitious documents may be generated to account for inventory being sent, or the signature of the customers may be forged easily. In such cases, the finance team need to rely on high outstanding balances or delivery orders without any actual payment to detect these schemes.

Many Companies do not practice reselling returned goods as they may be deemed as defective. Savvy warehouse staff can reach out to customers or even fake a purchase themselves and return the goods, only to later accept the returns and mark as beyond repair.

THE ETERNAL OPPORTUNISTS

Lastly, in relation to procurement fraud, your procurement team may be getting kickbacks from your suppliers. In such instances, the procurement team may collude with the warehouse team to report that certain inventory has a lower than actual balance so that they can initiate another purchase which looks legitimate, thus serving their best interest by way of kickbacks.

Some common steps to consider in order to beef up your warehouse controls:

Issuing goods received notes for all goods received, with a copy sent to finance and a copy sent to suppliers. This is an excellent way of helping the finance team decide if a bill should be paid or not, i.e. whether the goods were genuinely received.
Having sufficient security around. This can be in the form of CCTVs or security personnel checking the personal belongings of people who enter and exit the warehouse. Weighing mechanism has also been used to identify if people exciting are carrying more than when they came in, which is a common control mechanism for industries with heavy inventory.
Having barcodes for individual items which track their locations. For items which are too small to tag, the container used to store these items are tagged instead.
Make sure that scrapping of inventory is preceded with approval from different level of authority in order to ensure that scrapping can’t be done easily.
Ensure all returned goods are stored securely and dispose of in the best interest of the Company, e.g. through a warehouse sale.
Carrying out regular stock take and rotate the people who sign off on the stock take results. Make sure all variances are investigated thoroughly.
Ensure policies are in place for staff to report any conflict of interest, especially if any staff are close with suppliers or customers.
Ensure that goods are not circulating around the production floor during an inventory count.