Internal Controls for Discounts, Sales, and Sales Returns in a Bookstore
I have recently been assigned to conduct a forensic Audit for a bookstore, where my firm is tasked with quantifying a fraud incident and recommending measures to prevent future occurrences.
Overview of the Business: Bookstore
Fraud Description:
In a typical bookstore setting, there are usually 2-3 employees responsible for sales, managing sales returns, and determining discounts. According to company policy, employees are restricted from providing discounts beyond a set limit.
Fraud Scheme Details:
The fraudulent activity involved an employee processing a legitimate transaction—selling 5 books priced at $100 each for a total of $500—without applying the permissible 10% discount. Subsequently, this employee created two fraudulent entries:
1. A sales return for the 5 books, effectively reversing the actual transaction.
2. A new sales invoice for 6 books that included the 10% discount. This invoice calculated as follows:
– 5 books at $90 each ($90 x 5 = $450)
– Plus 1 additional book valued at $50
– Total: $450 + $50 = $500
Challenges:
1. In a medium-sized bookstore, it’s impractical to have more than 3-4 employees. Even with a segregation of duties between sales and discounts, there remains a significant risk of collusion among staff.
2. The additional book recorded in the transaction can be easily removed from the store, as the employee could simply instruct someone to take it out using the new sales invoice.
3. Occasionally, customers may genuinely request discounts, complicating validation efforts.
4. Cross-referencing invoices with customer data is challenging due to the high volume of transactions, and customers may not always respond as needed for verification.
If anyone has experience or insights from working in bookstores or similar retail environments where such fraud might occur, your input would be greatly appreciated!
One response
It sounds like you’re dealing with a challenging situation that requires a thorough understanding of both the fraud incident and how to mitigate similar risks in the future. Here are some thoughts and suggestions based on the common practices in retail environments, particularly in bookshops or similar establishments:
Analyzing the Fraud
Identify Patterns: Review transaction histories to identify patterns or anomalies, such as repeated transactions involving discounts or returns that align with employee schedules. This could highlight collusion or unusual activity.
Employee Behavior: Look into employee behaviors, especially focusing on those with the authority to process discounts, sales returns, and transactions. Consider unusual patterns in their sales data (e.g., irregularities in discount application or returns processes).
Internal Control Suggestions
Transaction Monitoring: Use software that flags unusual transactions automatically. For example, if a sale return is made shortly after a sale, or if discounts exceed the authorized amounts without corresponding adjustments.
Segregation of Duties: While it’s challenging with a limited number of employees, consider having different employees handle transactions, returns, and inventory management. Even if collusion is possible, you can implement checks and balances at different levels.
Inventory Tracking: Utilize inventory management systems to reconcile the physical inventory with sales and returns data regularly. This can help track any discrepancies and indicate possible theft or fraud.
Regular Audits: Implement routine internal audits, focusing on unusual transactions, employee performance, and inventory levels. This will promote accountability and deter fraudulent behavior.
Policies and Procedures
Clear Documentation: Ensure that all transactions, especially those involving discounts or returns, are well-documented with reasons for discounts and authorization signatures. This creates a paper trail that can be audited.
Training: Provide training for employees on internal controls, fraud awareness, and ethical behavior. They should understand the importance of adhering to policies and the ramifications of unethical practices.
Technology Integration
Point of Sale (POS) Systems: Consider upgrading to integrated POS systems that have built-in controls for discount management and transaction limits. These systems can often track user actions, providing logs for review.
Anonymous Reporting Mechanism: Introduce a whistleblower system that allows employees or customers to report suspicious activities anonymously.
Customer Receipt Verification: While you noted the challenges of customer follow-up, encourage customers to keep their receipts and have a clear returns policy that prompts them to show proof of purchase for returns.
Handling Customer Interactions
Review of Discount Policies: Make your discount policies explicit to customers, ensuring they understand the limits and the procedures for obtaining them.
Create Confirmed Sales: Whenever a discount is applied, consider having customers sign off or confirm the transaction detail receipt before proceeding with the transaction.
Conclusion
In summary, while the limitations you’ve outlined do present significant hurdles, implementing robust internal control measures and leveraging technology can reduce the risk of fraud considerably. Encouraging a culture of integrity among your employees while instituting preventive measures will create a more secure environment. It’s also advisable to keep an open line of communication with employees about these changes, as it could help promote adherence to policies.