Internal Controls on Discounts, Sales, and Sales Returns for a Bookstore
I have recently been tasked with conducting a forensic Audit to quantify a fraud that occurred at a bookstore. My firm is seeking to identify the nature of the fraud and recommend measures to prevent similar incidents in the future.
Business Context: Bookstore
Description of the Fraud:
In a typical bookstore, there are usually 2-3 employees responsible for handling sales, processing returns, and determining discounts. The company’s policy allows for a maximum discount, and employees are not authorized to exceed this limit.
The fraud unfolded as follows:
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Actual Transaction: 5 books were sold at $100 each, totaling $500. These books were eligible for a 10% discount; however, the employee conducting the sale failed to apply this discount.
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Subsequently, the employee entered two fictitious transactions:
- Entry 1: A sales return was recorded for the 5 books (essentially reversing the original sale).
- Entry 2: A new sales invoice was created for 6 books, with a 10% discount applied: (5 x $90) + (1 book worth $50) = $450 + $50 = $500.
Challenges and Limitations:
- In a medium-sized bookstore, it is impractical to have more than 3-4 employees. Even with segregation of duties for sales returns and discounts, there remains a significant risk of collusion amongst staff members.
- The extra book recorded in the fictitious entry can easily be removed from the bookstore, as an employee could simply ask someone to exit with the book and the new sales invoice.
- There may be genuine cases where customers request discounts, complicating the verification process.
- Due to the high volume of transactions and the unpredictable responses from customers, it is often not feasible to cross-check invoices against customer records.
I would appreciate any insights or experiences from others in the bookstore industry or similar retail environments where such fraudulent activities might occur.
One response
It sounds like you’re facing a challenging situation, and addressing fraud within a small team while maintaining operational efficiency can be tricky. Here are some observations and suggestions based on your post:
Understanding the Fraud Mechanism
Collusion: As you pointed out, collusion among employees can easily manipulate the system, especially in a small setup. This is a critical vulnerability that needs attention.
Fictitious Entries: Making fictitious entries for sales and returns can create a significant discrepancy in inventory and financial records that can go unnoticed without stringent controls.
Handling Discounts and Returns: The allowance for discounts, particularly when not properly documented or justified, opens up avenues for exploitation.
Suggestions for Internal Controls
Sales, Returns, and Discounts: Even if collusion is possible, it’s essential to separate responsibilities among employees where feasible. For instance, one person should handle sales, another returns, and a different one discounts. Clear policies should define the limits of their authority.
Systematic Checks:
Implement a system where each sale or return must be approved by a supervisor or manager. Use an approval process for discounts that requires justification, documented through emails or written forms.
Regular Reconciliation:
Monthly or bi-weekly financial reconciliations can also help identify unusual patterns of sales versus inventory management.
Audit Trails:
Use a POS (Point of Sale) system that maintains a detailed log of every transaction, including discounts and returns. Ensure that these records are tamper-proof and regularly reviewed.
Anonymous Reporting:
Establish a whistleblower policy for employees to report suspicious activities without fear of repercussion. This might encourage them to report if they notice unethical practices.
Employee Training:
Educate employees on ethical practices and the implications of fraud. Sometimes, simply understanding the consequences can deter employees from engaging in fraudulent activities.
Data Analytics:
Utilize data analytics tools to monitor patterns in sales, returns, and discounts. Look for irregularities such as a higher-than-average return rate for specific employees or unusually high discounts offered to certain customers.
Customer Feedback Loop:
Conclusion and Final Thoughts
Fraud prevention is about creating a culture of integrity and transparency while implementing robust systems that minimize opportunities for dishonest behavior. Encourage open communication among employees about the importance of ethical practices. Keep in mind that no system is entirely foolproof, but with ongoing vigilance and adaptation to emerging threats, your bookstore can mitigate risks effectively.
Feel free to reach out if you need further guidance or assistance on specific aspects of your Audit.