Internal Controls for Discounts, Sales, and Sales Returns in a Bookstore
I have recently been assigned to conduct a forensic Audit with the goal of quantifying a fraud incident that occurred at a bookstore and recommending measures to prevent similar issues in the future.
Business Context: Bookstore
Fraud Overview:
In a typical bookstore setting, there are usually 2-3 employees responsible for sales, returns, and discount authorization. According to company policy, employees are not permitted to exceed the maximum discount allowed.
Fraudulent Activity:
In this case, the actual transaction involved selling 5 books at $100 each, totaling $500. Although the books are eligible for a 10% discount, the employee in charge of the sale circumvented this by not applying the discount. Subsequently, the employee created two fictitious entries:
1. A sales return for the 5 books (reversing the actual transaction).
2. A sale invoice for 6 books, applying the 10% discount, which led to the following calculation:
– 5 books at $90 each (after the discount): $450
– Plus 1 additional book valued at $50
– Total: $500
Limitations and Challenges:
1. In a medium-sized bookstore, it is impractical to have more than 3-4 employees, increasing the risk of collusion, even with duties for returns and discounts separated.
2. The additional book recorded in the fraudulent entry can easily be removed from the store; it could be handed to someone who could exit with the new invoice (Entry 2).
3. There may be legitimate cases where customers request discounts, making it harder to differentiate between genuine requests and fraudulent activity.
4. Validating invoices against customer transactions is challenging due to the high volume of sales data, and customers may not always respond to inquiries in a helpful manner.
I would greatly appreciate hearing about anyone’s experiences or insights from bookstores or similar environments where such fraudulent activities might occur. Your feedback could be invaluable as I work on this Audit. Thank you!
One response
It sounds like you’re facing a challenging situation with the forensic Audit at the bookstore. Fraudulent activities like the one you’ve outlined can be quite complex, especially in a smaller team where collusion can occur. Here are some recommendations and insights that may help you quantify the fraud and implement controls to prevent future issues:
Quantifying the Fraud
Reconstruct Transactions: Begin by meticulously reconstructing all relevant transactions during the period in question. Identify any discrepancies between actual sales, sales returns, and discounts applied.
Comparative Analysis: Compare the number of sales and returns against historical data to identify unusual patterns. Significant deviations may indicate fraudulent activity.
Vendor and Inventory Analysis: Evaluate inventory levels and receipts. Discrepancies between inventory counts and sales records may reveal missing items or unrecorded sales.
Review Employee Activity: Analyze the sales performance and activity logs of the involved employees. Look for patterns such as an unusually high number of returns or discounts processed by specific employees.
Preventive Measures
Implement a robust POS system: Invest in a Point of Sale (POS) system that has built-in controls to flag unusual transactions, such as sales returns that exceed sales amounts. Ensure it requires managerial approval for discounts beyond specified limits.
Split Responsibilities: While you mentioned the limitation of having few employees, try to separate duties as much as possible. For example, assign someone independent of sales to handle approvals for discounts and returns. This may reduce the risk of collusion.
Regular Audits: Schedule regular reviews and audits of sales transactions and inventory. Rotating auditors can introduce an independent perspective and reduce the familiarity that might lead to fraud.
Employee Training: Conduct training sessions on ethical standards and the consequences of fraudulent activities. Ensuring that employees understand the importance of integrity can sometimes act as a deterrent.
Customer Feedback Loop: Consider implementing a simple mechanism for customers to confirm transactions post-purchase, such as follow-up surveys or sending digital receipts that can be verified.
Whistleblower Policy: Create an anonymous reporting system where employees can report suspicious activities without fear of reprimand.
Monitor Trends and Analyze Data: Utilize data analytics to monitor sales trends actively. This could help identify anomalies in sales patterns or employee behavior.
Lessons from Similar Experiences
In similar retail environments, collusion can happen despite small teams. Establishing a culture of accountability among staff has proven effective. Transparency in monitoring and performance evaluation tends to deter fraudulent activities.
Retailers have also benefitted from regularly reviewing and updating their internal controls and employee policies to adapt to any identified weaknesses.
Lastly, involving staff in brainstorming sessions on preventing fraud can increase their sense of ownership over the process and enhance compliance.
By taking these steps, you can help create a more secure environment and potentially reduce the risks of similar fraudulent activities in the future. Good luck with your Audit!