Is the Invoice Real?

How much does it cost (in time and money) to get the information and does the information justify the cost? This is the age-old question in accounting. I’ve always used the example of the Dollar Store. Assume that the store sells plastics combs out of a large bin for $1. The shop is counting its inventory. One choice is to count each of the combs in the bin.
Another choice is to use math: (Beginning Inventory) + (Purchases) – (Ending Inventory) = Combs Sold. The owner knows 3 of the variables already. Combs sold can be obtained from sales data. It’s easy to plug in the Ending Inventory number. An owner needs to decide which method justifies the time and expense. In most cases, we skip the physical count and use the math- why spend the time counting each comb?
“An Emerson Tool employee was indicted….for allegedly billing the company for a seven-year spending spree that cost more than $400,000. Part of the (employee’s) job…was to buy competitor’s products and evaluate them. He would be reimbursed for those purchases. But (the employee) used competitor’s logos to fake invoices so that Emerson Tool would fund his personal purchases”.
What to do? Obviously, it’s not practical to call every competitor to verify that the invoice represents goods purchased. There are several controls that require less work and might be effective. Verify a sample of invoices to determine if they are legitimate and communicate that control to all employees. Knowing the policy may prevent a dishonest employee from attempting to turn in a bogus invoice. Second, review costs reimbursed and the amount of review work performed. If the employee turns in receipts for 12 pieces of equipment but only provides an analysis for 5 items, there may be a problem.
The Lesson: The key is to weigh the dollar impact of potential theft with the cost to collect more information. Sometimes, additional review isn’t justified.
Your Homework: Are you reimbursing a large dollar amount of expenses to an employee? Is it to the point that you’re uneasy? If so, consider these procedures discussed above.
(Source: “Spending Spree Brings Wire-Fraud Indictment”, St. Louis Post Dispatch, 8/1/07)