Pepsi – Fraud was committed by employees in the United Beverage International Subsidiaries, they kept inventory of unusable and broken bottles on the books, wrote up the value of bottle inventory above cost, keeping $45 million of obsolete records on the books to satisfy the countries debt-to-equity requirementsSIMS Metal Management has launched an investigation into potential fraudulent conduct after finding the value of its British inventory had been ``materially overstated'', resulting in adjustments of about $60 million.Investors punished the world's biggest listed metal recycler following the news, sending its shares 5.01 per cent lower on the Australian market yesterday to close at $9.48.The company said the inventory in question was predominantly associated with the company's recycling solutions business at Long Marston near Birmingham in England and Newport near Cardiff in Wales.The businesses recycle electronics, including computers and televisions.
• Learning objectives
• Companies that have been involved in inventory-
related financial statement fraud schemes
• Inventory recording in the financial statements
• Reasons for committing inventory fraud
• Different types of inventory-related fraud
• Symptoms for detecting inventory-related fraud
• Conclusion – Game!
• Discuss inventory-related financial
statement fraud schemes
• Identify ways of searching for inventory-
related financial statement fraud symptoms
• Explain the importance of, and ways to
follow up on, inventory-related fraud
Types of Inventory
• Merchandise Inventory
• Manufacturing Inventory
• Raw Materials
• Work In Process
• Finished Goods
Where Inventory Belongs in the
• Income Statement – Cost of Goods Sold
+ Purchases of Inventory
- Closing Inventory
=Cost of Goods Sold
• Balance Sheet – Closing Inventory
Rule of Inventory Recording
=Lower of Cost
Effects of Inventory Overstatement
on the Income Statement
Reasons for Over-Stating
• To overstate income.
• To achieve goals.
• To increase the company’s value.
• To meet bank covenants.
• To hide poor operational performance.
• For management compensation.
• To affect future acquisitions or sale of the business.
• To hide the theft of inventory.
Related Fraud Exposures
• Double counting
• Capitalizing costs that should be expensed
• Cut-off problems
• Overestimating problems
• Bill-and-hold sales
• Consigned Inventory
• Accounting or Documentary
• Behavioural or Verbal
• Tips and Complaints
Searching for Inventory and
Cost of Goods Sold Symptoms
1. Wait until you discover them
2. Proactively search for them
Searching for Inventory
and Cost of Goods Sold
• Changes in record balances from period to
• Changes in relationships from period to
• Comparing information with other
• Comparing amounts with the assets they
• The five W’s
• Look for weak controls over
• Purchasing process
• Recording of liabilities
• Cash disbursements
• Transferring the cost of inventory sold
• Accurately tracking inventory costs
• Physically observing inventory
OCCURANCE - ACCURACY – COMPLETENESS – TIME PERIOD
Behavioural or Verbal
• Lifestyle symptoms (Not very effective)
• Behavioural or verbal symptoms using:
• Look for inconsistencies between
observations and results from inquiry of
Tips and Complaints
• The Nature of inventory-related fraud schemes means
that often, many people must be involved
• Physical goods
• Brought in – handled – shipped
• Talking with those personal who are in charge of
handling the inventory, vendors and customers
• Use inquiry methods to ask the right questions
• Often people suspect something but are afraid to speak out
#1 fraud detection method is investigation
following a tip or complaint
If you were going to
statement fraud, what
method would you use?
• Tasker, S. J., (2013). Sims shares slashed after $60m British inventory fraud. The
Australian National Daily Newspaper. Retrieved from:
• Maher, M. W., Lansen, W. N., & Anderson, S. W., (2007). Pepsi and Old Bottles.
Fundamentals of Cost Accouting 3rd Edition. Retrieved from :
• Vona, L. W. (2011). Inventory Fraud The Fraud Audit (pp. 237-249): John Wiley &