Inventory Chicanery Tempts More Firms, Fools More Auditors
Inventory Chicanery Tempts More Firms,
Fools More Auditors
A Quick Way to Pad Profits, It Is Often Revealed Only When Concern Collapses
A Barrel Full of Sweepings
By LEE BERTON
Staff Reporter of THE WALL STREET JOURNAL
December 14, 1992
Why do so many accountants fail to warn the public that the companies they audit are on the verge of collapse?
Increasingly, experts are blaming inventory fraud.
"When companies are desperate to stay afloat, inventory fraud is the easiest way to produce instant profits and dress up the balance sheet," says Felix Pomerantz, director of Florida International University's Center for Accounting, Auditing and Tax Studies in Miami."
Even auditors at the top accounting firms are often fooled because they usually still count inventory the old-fashioned way, that is, by taking a very small sample of the goods and raw materials in stock and comparing the count with management's tallies. In addition, Mr. Pomerantz says, outside auditors can fail to catch inventory scams because they "either trust management too much or fear they will lose clients by being tougher."
Growing Problem
The problem is growing fast. On Friday, Comptronix Corp., for example, disclosed that inventory manipulations played a significant role in the scandal at the once-highflying Alabama electronics company.
In November, William Hebding, its chairman and chief executive, told the Comptronix board that he and two other top officers had simply, though improperly, inflated profits by putting on the books as capital assets some expenses, such as salaries and start-up costs, related to the company's expansion. But on Friday, the company said the "fraudulent" accounting practices were started by making false entries to increase its inventory and decrease its cost of sales. Comptronix also said Mr. Hebding has been dismissed and its auditor, KPMG Peat Marwick, has resigned.
Nationwide, tough economic times have sparked a
Fools More Auditors
A Quick Way to Pad Profits, It Is Often Revealed Only When Concern Collapses
A Barrel Full of Sweepings
By LEE BERTON
Staff Reporter of THE WALL STREET JOURNAL
December 14, 1992
Why do so many accountants fail to warn the public that the companies they audit are on the verge of collapse?
Increasingly, experts are blaming inventory fraud.
"When companies are desperate to stay afloat, inventory fraud is the easiest way to produce instant profits and dress up the balance sheet," says Felix Pomerantz, director of Florida International University's Center for Accounting, Auditing and Tax Studies in Miami."
Even auditors at the top accounting firms are often fooled because they usually still count inventory the old-fashioned way, that is, by taking a very small sample of the goods and raw materials in stock and comparing the count with management's tallies. In addition, Mr. Pomerantz says, outside auditors can fail to catch inventory scams because they "either trust management too much or fear they will lose clients by being tougher."
Growing Problem
The problem is growing fast. On Friday, Comptronix Corp., for example, disclosed that inventory manipulations played a significant role in the scandal at the once-highflying Alabama electronics company.
In November, William Hebding, its chairman and chief executive, told the Comptronix board that he and two other top officers had simply, though improperly, inflated profits by putting on the books as capital assets some expenses, such as salaries and start-up costs, related to the company's expansion. But on Friday, the company said the "fraudulent" accounting practices were started by making false entries to increase its inventory and decrease its cost of sales. Comptronix also said Mr. Hebding has been dismissed and its auditor, KPMG Peat Marwick, has resigned.
Nationwide, tough economic times have sparked a