MUST READING FOR ALL LEVELS OF RETAIL MANAGEMENT

24 pages

TOPICS

History of Inventory Services

Internal vs. External Inventory Services

Selecting the Right Service for the Right Store Type

Monthly Inventories are Cheaper than Quarterly Inventories

Developing an Internal Inventory Crew for Better Control

What Causes Inventory Auditing Fraud?

Collusion between Inventory Auditors & District Managers

Service Contract between Retailer & Inventory Service

Two Fraudulent Inventory Services

HISTORY of INVENTORY SERVICES

Prior to 1929 the routine of employees counting stock was a cumbersome and costly activity. The burden lightened during the 1930s and 1940s and became less expensive when Congress approved a revolutionary system to arrive at cost figures. In 1953 the chore of counting stock began to transfer to professional inventory services, resulting in faster and more accurate counts, which reduced cost still more.

Before we can fully understand why inventory services became an essential tool of retailing, a few terms and techniques must first be explained.

Fiscal year is an accounting period of 12 months. Fiscal year end is the last day of that accounting period, and can end any day of the year prearranged with the Internal Revenue Service. Fiscal year end inventory is the total cost of stock on hand at the fiscal year end. This cost figure is used for annual property taxation.

The second definition of fiscal year relates to financial matters. When retail companies require more frequent scrutiny of their activity, such as monthly, quarterly, or biannual reporting, fiscal inventory figures are compiled more often. But fiscal year-end inventories remain a must.

Since the greatest volume of business is transacted ending November and December, it is most difficult for retailers to find time to count the physical inventory on December 31 or January 1. Nor do retailers want that excess stock taxed. Thus, in the business world, especially retail business, many establish their fiscal year end on dates other than the calendar year end.

Physical inventory is the stock on the shelf at any given time that can be seen and touched. It can also mean the physical act of counting the stock to arrive at a fiscal figure. In other words, the retailer counts his physical inventory to arrive at his fiscal inventory. Today this count is normally taken at retail then adjusted to cost.

Retailers, who desire to know their losses, will compare the physical inventory to the perpetual retail inventory. The negative difference between these two figures is known as shrink. There are two categories of shrink — known shrink and unknown shrink. Damaged merchandise, spoilage, and store use of shelf stock are tallied on paper, the total of which is "known shrink." A combination of five factors; pricing errors, cashiering errors, accounting errors, inventory errors, and theft cause "unknown shrink".

The perpetual retail inventory is a continual addition and subtraction on paper (or by computer) of retail stock figures — commonly called a retail book inventory, or book for short. The "book" begins by extending the cost figures on each invoice to retail, then posting to a master log (this is automatically accomplished if the retailer is scanning in all deliveries). The "book" ends by subtracting retail sales from the log (this is automatically accomplished if the retailer is scanning sales at the front end). The name given the log is not important. It is a descriptive term that some call a receiving log, a merchandise report, a daily report etc.

The theory is, "Whatever happens on the shelf must correspondingly happen on the log." You begin with a physical inventory figure at retail posted to the log. Everything thereafter placed on the shelf at retail is posted to the log at retail, and everything taken off the shelf is taken off the log. With several other minor adjustments along the way — Presto! The perpetual retail book inventory.

This system makes the retailer aware of how much should be on the shelf at any given moment. The physical inventory can then be counted to determine what is actually on the shelf at that same moment. Comparison of the two retail figures will determine shrink.

Retailers using this "theft measuring system" know their gross profit beforehand. It is called going-in-gross. At the end of each day the log is totaled to retail and cost. At the end of the accounting period all logs have been entered into the computer. Total cost of goods is subtracted from total retailed invoices. The result? — Going-in-gross profit in dollars.

This simple accounting system requires two man-hours of work a day if written. With computer links to sales and receiving, it is accomplished automatically. Going-in-gross profit at any point in the accounting period can be determined in both dollars and percentages at the push of a computer button. Shrink, however, can only be determined by comparing the retail book inventory to the physical inventory, which requires physically counting the stock at retail.

Ninety-five percent of retailers are not using the "theft measuring system" described above. Therefore, their shrink remains unknown, because they operate on what is called coming-out-gross. Coming-out-gross is figured by simply subtracting cost-of-goods within any given period from total retail sales within that same period. The difference is called "coming-out-gross profit." Percent of gross profit can also be figured. However, these figures do not include shrink in dollars or in percentage, because there is no record of shrink. Therefore, if the "coming-out-gross percentage" is too low, prices are either increased to compensate for the loss, or product mix is adjusted to create a higher gross profit. In doing so, these retailers price themselves out of competition.

What they don't realize is that they could have achieved a higher gross profit by controlling shrink. But, since they don't measure shrink, they see no need with investing their time in shrink-prevention. Simply stated, by controlling shrink the retailer remains competitive and makes higher profits.

The beginning of Inventory Services

Prior to 1929 the system of physically counting the inventory was laborious. Back then the year-end inventories were counted at cost, requiring days, and sometimes weeks of preparation.

Before the physical count was taken, employees priced every item with cost stickers. During the inventory audit, employees were divided into crews of two — one counting, the other listing the figures on paper, accumulating hundreds of inventory sheets. After the physical count the cost stickers were removed. Office staff then extended the counts by hand, since calculators were not yet perfected for this purpose.

Inventory counting was so cumbersome that many stores closed for the duration. Payroll could not be offset by sales. Costs were tremendous. Consequently, counting inventory at cost to arrive at a fiscal figure remained only an annual event. But, in 1929 a simple mathematical conversion reduced this to a manageable activity. The impetus behind this new inventory system was the proliferation of chain stores. Toward the end of the 19th Century retail stores with more than one outlet came into vogue. When the "roaring twenties" arrived (1920-1929), their popularity increased, and America experienced a rapid growth in multi-store operations called "chains."

This continued until the stock market crash in 1929 when growth came to a standstill. Chains that survived the collapse found themselves cutting expenditures everywhere. The financial burden of arriving at the fiscal inventory at cost was discussed. "Eureka! If we count inventory at retail, then subtract our average gross profit to arrive at cost we can save millions!"

The government was immediately petitioned with the concept, and permission granted before the year-end. What took weeks to accomplish before 1929 was instantly reduced to one day by a simple equation.

With the '30s and '40s came supermarket expansion. Stores turned their product so rapidly that inventory shortages became a chronic problem. Again retailers met to discuss how best to measure shrink. The perpetual retail book inventory compared to the physical retail count was their answer. Supermarket chains, such as Kroger, Safeway and A&P immediately adopted this "theft measuring system," enabling them to expand more rapidly with funds saved by controlling their shrink. But, to make the system work effectively, more frequent inventories over shorter accounting periods were required.

At first the employees continued to take inventory by the count-and-list method. Not being professional auditors, coupled with lost, misplaced, or unreadable inventory sheets, figures were too inaccurate for adequate comparison to the perpetual book. To acquire the necessary profession-alism chain operators decided to create their own internal inventory crews. Following the procedures of store employees before them, the auditing crews at first worked in teams using the count and list method, and just as before, it took days for office staff to extend the inventory.

The internal inventory crews were made up of near-retirement-age managers, or managers who were burnt-out. Realizing no advancement within the department, they had no incentive to hustle. Although faster and less expensive than store employees, they were still too slow.

In 1953 a man by the name of Jack Washington, an internal auditor from California, decided to start an external inventory service for indepen-dent drug stores, counting inventories at night and on weekends. Washington Inventory Service, d.b.a. WIS, was founded on the West Coast.

WIS counted into tape recorders. Later the counts were extended with calculators. This accelerated the old count-and-list method at the store, which greatly reduced the cost to retailers, but it still delayed the fiscal figure for several days to several weeks. In addition should errors exist in the count it was impossible to track after the auditors left the store.

In 1959 that problem was solved. Two internal auditors in the mid-west decided to start an external service for Supermarkets. Retail Grocers Inventory Service, d.b.a. RGIS, was born in Michigan.

RGIS crews, while physically counting the stock, immediately entered their counts into fifty pound rotary calculators mounted on shopping carts. Electric power was carried to the calculators by 100-foot extension cords plugged into wall sockets.

The inventory crews worked in teams of three. Two alternated their counts while the third entered their counts into the calculator. This system was faster than the old count-and-list method, with one more dimension added — instant inventory figures. It not only offered retailers another reduction in cost, but also provided immediate comparison of stock figures before the auditors left the store. Should sectional figures be challenged, those areas were recounted for verification, lending still greater accuracy.

Through the innovations and inventory cost reductions of these two companies, many chains made the transition from internal crews to external inventory services. Independents benefited the most.

In 1960 RGIS had expanded into northern Ohio. Jim Walden, a manager for Wrigley's Supermarkets in Cleveland, Ohio, had met the owners of RGIS while they were inventorying his store. He watched the process with fascination and determined yet another innovation, which would reduce cost more. That year Walden and his wife, Lee, founded Accurate Inventory Service in Cleveland.

Jim and Lee perfected a system of counting that reduced the team of three to two. Instead of taking the counts from two alternating callers, the person operating the calculator counted the eye-level shelves himself and entered his counts between the counts of one caller. This effectively reduced crew payroll cost.

As Walden was able to compete with RGIS in price, his company expanded rapidly. By 1963 Walden was employing full time auditing crews to service both the old Alber’s Colonial Stores headquartered in Columbus, Ohio, and the Lawson’s Milk Stores in Cleveland. On weekends part-time auditors counted independent stores.

By 1965 Walden had expanded with Colonial to the East Coast and southeast. WIS remained on the West Coast. RGIS moved out of northern Ohio and expanded into Chicago.

That year Jack Henry, a former bread deliveryman for Kern’s Bakery, joined the Walden team in Columbus, Ohio. Within four years Henry had helped Walden expand to thirteen states, moving three times himself, and opening two new territories. During this period, Henry hired and trained Ray Crook, an accounting student studying at Ohio State University. After college Crook continued to work part-time for Walden while working full-time in the accounting office of A & P Supermarkets. Both Henry and Crook remained with Walden until 1969 and 1971 respectively. Walden changed his company name to Walden Inventory Services, Inc.

By this time electronic calculators were evolving for inventory services. Auditors could now count and enter on their own, which enhanced accuracy even more. Washington Inventory Service quickly made the transition from tape recorders, while RGIS made the same move from the old rotary calculators. As a result both companies expanded nationally almost overnight. Today WIS and RGIS are the two largest inventory services in the USA.

In 1969 Henry moved to Longview, Texas to complete his college education and founded Accurate Inventory and Calculating Service, d.b.a. AICS. In addition, he offered his customers a security shopping service and a bookkeeping service, which included the installation of the perpetual retail book inventory system. In 1973 Jack Henry expanded his inventory service to Virginia. He later sold this portion of his company to his East Coast manager, Jimmy Jones.

By 1975 Henry was counseling his customers on shrink control. His loss prevention suggestions developed into a seminar entitled. The Jack Henry Total Theft Control System. At first he offered this inventory control system to his customers at no cost.

Meanwhile, Ray Crook stayed in Columbus, Ohio, and after resigning from A & P, founded an inventory service by the same name as Henry's company. From 1971-1980 Henry and Crook cooperated under a gentleman's agreement not to infringe on one another's territory.

On March 1, 1980 Jack Henry sold his inventory service to devote his energy full-time to The Jack Henry Total Theft Control System, teaching his loss prevention program in 100 seminars a year throughout the United States and Canada. In addition he has produced nine loss prevention videos for use in classroom training, and has developed a self-study course with the videos, a workbook, and a policy manual. His training programs are used around the world in over 30 nations. Today he is president of Security Training Corporation, which owns THEFT TRAXTM newsletter.

When Henry sold his inventory service, Ray Crook founded Quantum Services, which offers, in addition to inventory, a number of other services, such as store procedure and observation trends report, continuing education programs for managers and owners to improve store operations and reduce shrink, and a comprehensive security shopping service. Quantum is headquartered at 4284 North High Street, Columbus, Ohio 43214.

Crook’s AICS Inventory Service specializes in convenience store audits only, and is today the nation’s largest service exclusively for that industry.

What is next on the inventory-counting horizon? No one knows. Many have experimented with methods and systems in an effort to eliminate the physical count. But at present, nothing short of stardust can take the place of a calculating brain inside the mind of a trustworthy inventory auditor working for an accurate inventory and calculating service.

INTERNAL vs. EXTERNAL INVENTORY SERVICES

As I have experienced them

By Jack Henry

When chain retailers determine that more frequent inventories are a necessary function of loss-prevention, they must consider using an external inventory service, or develop an internal auditing team. There is no choice for the independent retailer having one, or a few stores. Unless this operator has employees count the stock, which is archaic, the external service is a must.

Almost all retailers will experience an evolutionary process in inventory audits. For example:

1. Small regional chain operators normally hire external inventory services.

2. Large regional chains are tempted to go internal for either a perceived monetary savings, or for better control of auditors.

3. National chains, long experienced in using both systems throughout their growth, are able to incorporate a mixture.

Each of the three retail operators will make their choice based upon several factors. We will discuss a few, but by no means will this be an exhaustive examination.

The Small Regional Chain

Small regional chains must use inventory services that are close to their stores. "Close" in the inventory business may mean 200 miles away. Not experienced in selecting a quality service, small chain retailers may contract the least expensive. (There are many cutthroat inventory services from which to choose). Consequently, when picking a company based on price alone, these retail operators find themselves jumping from service to service, frustrated in their search for good figures.

Evidence of poor inventory service is reflected in chronic bouncing inventories, i.e., overages one period — shortages the next. Retailers not utilizing the theft measuring system, realize the same problem as a low gross one period — a high gross the next. This phenomenon is referred to as "bouncing inventories."

In choosing a quality inventory service, accuracy is a prerequisite. But, there are other qualities as well. For example, if the auditors of a cutthroat service do not understand how to spot manipulated paperwork, or cannot detect simple paperwork error, what good is an accurate count? And, if they have not been trained to recognize dishonest padding of inventory, or were never shown how to control the movement of stock during count, or were never taught how to make proper cutoffs, then bouncing inventories are inevitable. If the service cannot control these three vital functions, there will be bouncing inventories.

Retail operators, who select inventory services by price alone, apparently have no concept of this. Unfortunately, they do not consider that the problem created by cutthroat auditors is of their own choosing. Yet, as competitive retailers, they should be the first to recognize that reduced prices demand reduced service. Some seem to be blind to this fact when selecting inventory services.

The truth is, cutthroat inventory services can ill afford quality auditors, auditors that can both count and be dependable at the same time. To compound the problem, these services have no additional funds for auditor development in other vital areas that collectively assure accurate inventories. Auditors are trained to count, and no more. The only solution to retailers is to change services if inventories continue to bounce. Eventually, they become embittered with all inventory services. "None are any good," they complain. Consequently, when a high-quality, appropri-ately priced service seeks their business, retailers are unable to recognize them for what they offer. Hence, they retain the cutthroat services and average the bouncing inventories. By year-end, if overages outweigh shortages, they go golfing. In the event they do not, they first change inventory services, then tee off.

The economics of solving the problem by going internal is no option either, since the cost to hire the least expensive service is so much cheaper than the increased expense to develop an internal auditing crew. Besides, in the small chain atmosphere, no employee is capable, or available to do the job.

Selecting the Right Service for the Right Store Type

Retailers in large metropolitan areas have several good services from which to choose. However, selecting the inventory service that has been in business the longest, or that can offer the most references, is not necessarily the right service for some types of stores. For example, a reputable service that inventories all store types is not as high quality as that which specializes in one particular retail field. To be more specific, auditors that have just counted JCPenney's cannot go across the street and count 7-Eleven as accurately as a service that specializes in c-store inventories. Selecting a reputable service for the wrong store type results in bouncing inventories.

Another consideration in selecting a service for accuracy is the number of auditors the service permits in each store type. For example, should a service have too few auditors in a large store, the tendency is to estimate large portions of the inventory to stay on schedule. Conversely, should a service flood a small store with too many auditors, confusion lends to inaccurate figures. The result in both situations is bouncing inventories.

Once small chain operators contract with a quality service, one that has specialized in their store type, with the added ability to stop bouncing inventories, the price will be double or triple the cost that retailers are accustomed to paying. However, retailers who select this high-quality, yet higher-priced service, are to be commended.

Monthly Inventories are Cheaper than Quarterly Inventories

Beware of the tendency of taking less frequent inventories when there appears to be no problem. I have known retailers, who, when inventories stabilize, forget what it was like when there were bad inventories. Instead of being satisfied with the accomplishment of a quality service and stable inventories, they begin thinking of the high-priced audits, and shift to less frequent inventories. In doing so, shrink will return and eventually will exceed the cost of more frequent inventories.

Worse yet is the retailer who tends to forget who helped solved the inventory problem, and takes all the credit himself. Or, he might think that it just corrected itself. At any rate, he begins to reason that inventory taking is an unnecessary expense, since it constantly reveals no problems. He dreams of saving money if he stops taking inventory, or goes to a cheaper service. Soon he begins to complain to the reputable service about price — even threatening to take bids from competitors, unless they lower their fee. Like vultures, cutthroat competitors start circling. When the time is right, they swoop down from everywhere, offering cheaper rates and promising identical results. When (and not if), this retailer succumbs to the temptation, the cycle of bad inventories will eventually return. Yet, he seems never to realize that the higher shrink would have more than paid for the quality inventory service, had he not changed.

The Large Regional Chain

Good and bad inventory services can be found everywhere. Consequently, large regional chains may experience the same problems as small chains. However, their choices are broader.

For example, as a preferred customer of the external inventory service, the large retail chain can demand the best price break, the most experienced auditing crew and the premium inventory dates and times. Of course, placing too much emphasis on dates or times may be a detriment to the retailer if the service is over-extending on month-end, or quarter-end inventories. In this situation either the service counts with too few auditors, or it hires new recruits, who have little or no experience. The result is bouncing inventories.

The best service can be obtained when the counts are staggered throughout the period. This is a small matter for large regional chains utilizing the "theft measuring system," which system allows for easy and accurate cutoff any day or hour within the period. Besides, large chains desiring to expand their operation to even greater numbers, must stagger inventories to proportion the accounting workload. Without that there can be little growth.

Many times it is the uncompromising corporate Accounting Department that becomes the obstacle to chain store expansion. Accounting may view staggered inventories as an anathema, arguing the increased bookwork necessary for adjustments pose risk for error.

This argument is unwarranted. The perpetual retail book inventory, when compared to a periodic physical retail inventory, is a shrink control system, not critical for Accounting, but vital to the Loss Prevention Department. Both departments, however, need the physical inventories. Loss Prevention, however, cannot operate efficiently without staggered inventories. Accounting can — with a little extra paperwork. The greatest potential for store expansion is when Accounting accepts staggered inventories, and simply adjusts figures forward or backward to accommodate financial reporting cutoff dates.

Nevertheless, if the Operations Department succumbs to the unwarranted pressure from Accounting, and opts for a calendar month end, or quarter end inventory, it is transferring a higher risk for error to an over extended inventory service. The result will be bouncing inventories.

In yielding to the pressure of Corporate Accounting, Operations has not considered which error is easier to detect. Although it may be extra work for Accounting, the fact remains that paperwork is documented, making it possible to track potential oversights, long after the count. However, when errors are made on inventory counts, it is virtually impossible to find that error after the auditing crew leaves the store.

On the other hand, should the errors be in paperwork, and not in the calendar-end count, Accounting will never admit it, nor search for their mistakes until a second inventory audit is taken. When Accounting calls for a recount, it faces the same dilemma as staggered inventories. It must adjust its figures to the date of the second count. Many times the error is found in Accounting during the adjustment to the second count. But will Accounting admit it? No way! When the inventory "comes back" after the second count, the blame is always put on the first count as being a bad count.

By demanding calendar end inventories, Accounting accommodates yet another risk greater than the over-extended inventory service. When corrupt managers know the exact inventory date, they can manipulate figures or stock to pad the count.

Opting for an Internal Inventory Crew

The large regional chain operator has the option to go internal with an inventory audit team. However, if the reason is monetary savings, several obvious and hidden costs must be considered.

Obvious Costs

Payroll and benefits.

Travel: includes cost of automobile, gasoline, all maintenance, and insurance.

Motel and meals.

Hidden Costs

Cost of bad audits. The operator does not pay an external service for a bad inventory count, since a reputable service will guarantee its count. However, all man-hours and expenses are paid to the internal crew.

Training. The inventory auditor is an entry-level position with not much future for advancement within the department. Consequent-ly, there is employee turnover, either through attrition, or advance-ment out of the department. In either case the training cost for a new-hire must be borne.

1. Fringe benefits. Vacation, sick pay, FICA, workman's compen-sation and other employee benefits, may add 20 percent to the quoted salary.

2. Soft cost. Payroll processing, filling out workman's comp forms, medical forms, government reports, etc., could add as much as 10 percent to the quoted salary.

Developing an Internal Inventory Crew for Better Control

Now, let's consider the large regional chain that opts for the internal inventory team for better control of auditors. In this case the operator's argument against an external crew may be: "I can't get the counts when I want them." Or, "I can't control who they send me." Or, "My managers and I will be more confident with the count of our own internal crew."

The first two statements may be valid arguments. But, "valid arguments" are impossible to justify with an internal inventory crew, given certain conditions. First, if the chain operator was dissatisfied with the external service because it could not deliver on the desired inventory dates, neither can an internal crew service all stores at once, because of limited manpower. Second, if the external crew was unable to reschedule quickly for instant recounts on demand, neither can the internal crew reschedule quickly, unless another inventory is cancelled. Third, if the external crew did not have the manpower to supply alternating crews when requested, neither can the internal crew. Fourth, if the external crew was unable to stabilize the crew with the same auditors, neither can the internal crew. In every case, the retail operator is mistaken in believing these problems are solved with an internal team. Although the argument may seem valid, the problem is not the external service, but rather, the inflexibility of the retail operator, or accounting, who puts undo pressure on the retail operator.

Another invalid reason for going internal is when the operator says, "My managers and I will be more confident with the count of our own internal crew."

This statement is made in total contradiction to human nature. When inventories appear to be bad, all levels of management, including upper management, will first attack the auditors, whether they are internal or external! This has been my experience since 1965, when first entering the inventory service business. I have seen very few owners, supervisors, managers, and lowly employees collectively, and perpetually respect internal or external inventory auditors, much less have confidence in them.

Prove it to yourself. Travel one week with your internal auditors! You will witness unrestrained verbal abuse, which will confirm that very few have confidence in them.

At the first store, if the inventory reveals a large shortage, the manager first questions the auditor's sanity — then scoffs at his or her ability to count.

"Anyone in his right mind," cries the manager, "knows I can't be that short! Why, they'd have to haul it out of here by the truckload to lose that much inventory! You'd better count this thing again, and this time count it right!"

Should auditors raise an opinion to managers and/or supervisors as to how they might solve the shrink problem, they are rebuked following a brief inquiry into their experience as store managers.

"Have you ever run a store?"

"No, but . . ."

"Then don’t try to tell us how to run mine!

When the crew walks into the second store the manager bemoans, "Oh no! Not you again! I hope you count me better this time than you did the last time."

At the third store the manager complains, "Why did they send you? You always count me short. I wish they'd send someone who could count."

Observing the life of auditors for one week will convince the operator that it is sheer folly to assume that management will gain confidence in the inventory count just because auditors happen to be on the same payroll. By the very nature of their job function, auditors as a whole, whether internal or external, will not now, nor will they ever win the confidence of the majority of managers. Of course, there are individual exceptions.

Top management also has the problem of recognizing the importance of auditors. In my opinion, auditors should be the first invited to a shrink seminar. But, when I conduct in-house loss prevention seminars for store managers, auditors are conspicuously absent.

When I ask, "Where is your inventory crew?", one of two answers is given.

"Oh, were we supposed to invite them?", or ...

"We would rather they not come. There's too much bad blood between auditors and managers."

Internal auditors seem to be the corporate outcasts at other functions as well. You will find them at company picnics in some far corner sitting and eating alone. Rarely are invitations extended to them for the annual Christmas party. And during the company softball games, where are the auditors? You guessed it. They were given the wrong schedule.

No one wants to socialize with these "bearers of bad news." Not even the owner. As one retailer put it, "Auditors are the corporate police force, and which person causing a problem, or responsible for solving it, wants the police around?"

So, to argue that "My managers and I will be more confident with the count of our own internal crew," is invalid.

National Chains

National chains, long experienced in using both internal and external inventory auditors throughout their growth, are able to incorporate a mixture of both.

Some are so wide spread, such as K-Mart and Wal-Mart, they must contract entirely with outside inventory services. Usually they hire a national service, such as RGIS or Washington Inventory Service, to keep continuity in billing and communication. However, others will consider a regional inventory service best suited for their needs.

National chains, such as supermarkets, drug stores, and convenience stores, with more concentration of stores within a geographic area, may stay completely with internal auditing teams, or they may use a mixture of internal and external inventory crews.

Sometimes it will fluctuate with need. For example, if a new territory has only a few stores, it may be advantageous to temporally engage external contractors. Or, if a company is experiencing bad audits within a region, and overloads the internal crew, then outside professional help may be necessary.

In the final analysis, whether a company opts for an external or internal crew is not as significant as to whom the inventory auditors answer. Following are some examples of problems created by placing auditors under the wrong authority.

In one national chain, inventory auditors, whether internal or external, were placed under the authority of District Managers. At the behest of one DM in Birmingham, Alabama the auditors padded the count for one year by $88,000. A similar situation occurred at their Phoenix district.

In both locations the auditors were internal! But, in Little Rock, Arkansas, with only seven stores, the DM was permitted to contract an external inventory service. Although the DM received permission to hire the service, he was not told to rent a portion of his district office to the service and pocket the money, which he did. In addition he was not allowed to accept a monthly kickback from the service to retain the business, which he had.

The loss-prevention director in Houston told me this story, only after the DM and the inventory auditor had vanished. It was following their disappearance that my company was contracted to take the inventories. At the end of our first count, seven stores, which had never experienced bad inventories under the previous service, were now $53,000 short.

When the LP Director flew to Little Rock to visit me, I asked him, "Why did Loss Prevention, which is responsible for asset protection in 1,200 stores, permit these three losses to develop to maturity, much more, allow them to continue. His answer, "Loss Prevention consists of me alone."

When I questioned why auditors did not answer to him, he replied, "I have no staff. I must rely on District Managers as my security arm. That's why auditors were placed under their control. I know it's not good, but I have no budget to do otherwise."

The damages this company incurred, not to mention the unknown losses never discovered, could have been prevented with an adequately staffed Loss Prevention Department. Losses prevented would have more than funded the Department.

As this story illustrates, it is extremely important that inventory auditors, whether internal or external, not answer to a person in a position that can be compromised. Assuming the inventory auditors are the police force within a company, they should be answerable only to the security/loss prevention department, or to a corporate officer. They should never answer to store managers, store supervisors, district managers, regional vice presidents, store operations, accounting, or personnel departments. Internal inventory auditors should answer only to the Loss Prevention department head.

WHAT CAUSES INVENTORY AUDITING FRAUD?

by Carl Jackson and Jack Henry

Inventory auditing fraud by external inventory services is the act of creating fictitious inventory figures for one of four reasons. First, to complete the inventory on schedule when crews are short-handed. Second, to make a "fast buck." Third, to gain monetarily through collusion with one or more store employees. Fourth, to make the inventory service look good.

The benefits of using an external inventory service have been featured in past Theft Trax newsletters. Choosing an honest service, however, may be difficult. There are good and bad inventory services just as there are good and bad product suppliers. An inventory service is a supplier — a supplier of service. Like any dishonest DSD delivery driver, dishonest inventory auditing is detrimental to your bottom line.

Auditing fraud does pervade the retail industry. As a result good inventory services suffer. Therefore, we feel it our duty to alert you to the problem. The purpose of this article is to help you identify and prevent inventory-auditing fraud.

Most fraud will occur on calendar year-end (December 31-January 1), when the majority of retailers take inventory. Below is a list of reasons that would cause an external inventory service to create fictitious figures. We will follow with a discussion of each.

1. Supply of manpower is tight.

2. Short-handed inventory auditing crew scheduled too tightly.

3. Service fee too cheap.

4. Inventory auditors not taught purpose of periodic inventory counts.

5. Inventory auditor's pay scale based upon dollar amount of inventory counted.

6. Lack of good business ethics on part of owner of inventory auditing service.

7. Inventory auditor in collusion with the manager, supervisor, or district manager.

Supply Of Manpower Is Tight

Inventory services rely heavily on manpower. As a result they are susceptible to fluctuation from good to bad and back to good, depending upon manpower supply. During poor economic conditions, when unemployment is high, inventory services are able to hire good auditors. Conversely, when economic conditions are good, and the percentage of unemployment is below national in your area of the country, fewer good auditors are available.

Suggestion: When hiring an inventory service, beware of the one that strictly recruits manpower from competitive companies, or that subcontracts the work. Such a service carries the ills of a combination of bad systems. Ask your contact for written procedures on recruitment, selection and training practices. A reputable service should have this information readily available. Look specifically for educational requirements, math tests administered to applicants, and the extent of classroom training before new auditors enter the store. Ask how new auditors are monitored in the store and what procedures are taken when errors are made. Finally, demand a contract that guarantees final figures are accurate counts and not estimates. Some large retail chains have demanded the service buy a performance bond. This is important should you need to take the inventory service to court for fraudulent auditing. We document this with two prosecuted cases that you will read later.

Short-Handed Inventory Crew

If an inventory crew is short-handed, it will most often be during calendar quarter and calendar year end, when the majority of retail stores take inventory. Even good services suffer from this reality. Forty percent of the annual gross income of many inventory services is generated during five weeks (December 26 to February 1). Another 40 percent is generated in six weeks (two weeks each side of the remaining three calendar quarters). The farmer's saying, "Ya gotta make hay when the sun shines," applies to inventory services that rely on eleven weeks a year to produce 80 percent of their annual income. Obviously, such services will either be short-handed during those periods, or have too many inexperienced auditors.

Suggestion: When hiring an inventory service, ask for a percentage breakdown of gross income by month. You may have to wait for these figures. Demand by contract that no more than one-third of the auditors be new-hires when counting your store. Example: A six-person crew should have no more than two new auditors. Specify by contract that "new auditors" are those employees with three months or less experience, meaning each of the remaining four auditors have three or more months experience.

Another consideration is to change your fiscal year end to an off-month; or take the inventory on an off-month or off-week, then adjust paper figures to your calendar quarter. This assures the best count, since the most experienced auditors will service your stores during slack inventory periods. Although your accounting department may argue the point, it is a simple task to adjust figures, and much simpler to find accounting errors than to call for a recount, then adjust figures.

Service fee is too cheap

Some good auditors go into their own inventory business because they perceive a "fast buck" can be made. These owners do not acquire retail customers by historical reputation, but by price slashing. Usually their customers come from their previous employer. For example, a good auditor who is paid $50 for a five-hour audit learns that his employer charged the retailer $200. The auditor reasons that he/she can make twice the money by charging half the price.

Overhead is rarely understood by these cut- throat services. Once in business they discover that costs are eating their profits. Instead of increasing the inventory charge to a reasonable amount, they reduce man-hours by estimating large sections of inventory.

Suggestion: When hiring an inventory service, do not let price be your sole decision-maker. Ask for references, then call their references. You may discover that other retailers are being charged a higher price, which means that the low price offered you will be jacked up later. If other stores are paying the same low price, you may learn that they are not happy with the service, which is a clue that you will not be either. The old saying, "You get what you pay for, " stands true when hiring an inventory service.

If you discover the service is reputable, yet you feel the price can be lowered, don't hesitate to negotiate. For a lower price, you may offer to move your inventory to an off-week or off-month to keep the inventory service busy during stack inventory periods. You may offer to count your own dumped displays, end displays, coolers, and back rooms. These figures, however, must be included in the billing so that both the inventory service and you benefit from the lower cost. These figures must not be given to the auditing crew in total dollars. They must be on paper with each count and price listed. The inventory crew must spot check the counts and calculate the written inventory.

Inventory Auditors are not taught the Purpose behind periodic inventory counts

Price-cutting inventory services cannot afford "help wanted" ads or office space for proper interviewing and classroom training. Many larger inventory services may have these amenities, yet fail to train their auditors on the purpose behind periodic inventory counts.

Proper training goes beyond accurate counting. For example, one auditor, who had passed intense classroom training on accurate counting procedures, was later caught counting short on year-end inventories. When questioned why, she answered, "I was told by another auditor that owners want short inventories on year-end so they don't have to pay taxes." This is fraudulent, and teaches inventory auditors that shortcuts are okay.

Most inventory services fail to mention to their employees that the main purpose behind inventory counts is to measure inventory loss. Those who make a casual reference to shrink may neglect to teach their auditors how the perpetual book inventory at retail is created and how it relates to an accurate physical retail count. Without this basic knowledge, inventory auditors have no concept that they are held accountable to a book figure. This should be taught early in the auditor's training, since it instills in each auditor the need for personal accuracy.

Suggestion: When hiring an inventory service, ask your contact to explain in detail the purpose behind the inventory count. If the answer reveals your contact is well versed in the book inventory theory, then ask how that information is passed on to the auditors in classrooms, or on-the-job training. If the answer is still positive and you hire the service, ask each crewmember the same question sometime during the audit. You may discover that what your contact says is not what is taught. Without this basic knowledge, a short-handed inventory service, when falling behind schedule, will be tempted to estimate large sections of inventory.

Inventory Auditor's pay scale based upon Dollar Amount of Inventory Counted

An Inventory service that charges a retailer $2.00 per thousand dollars of inventory, then pays an auditor $8.00 per hour to count it, loses money when a new-hire counts only $3,000 per hour. Auditors must produce twice to three times their pay to make the Service Company profitable. For example, the above auditor must learn quickly to count with accuracy a minimum of $6,000 per hour. When store conditions warrant it, an experienced auditor can count from $8,000 to $10,000 per hour with accuracy, while an exceptional auditor may peak at $12,000 per hour. A pay scale based upon production figures obviously puts pressure on auditors who count slowly. To increase their income, they may revert to estimating large sections of inventory.

Fast counting auditors, who also maintain accuracy, are most valuable to the service. But who monitors their accuracy? To receive larger pay- checks, they may backslide. Good auditors have been known to turn bad if not continually made accountable to someone else's count. If the service has no built-in checks and balances, such as spot- counters, a pay scale based upon production is detrimental to your company. Such a system begs for mass estimation by unethical auditors.

Suggestion: When hiring an inventory service, ask your contact for the pay scale of auditors. Ask how their hourly wages are acquired. If paid on production, ask how accuracy is monitored. A service not willing to divulge this information should not be considered for hire. If this information is offered without hesitation, you may consider hiring the service. If you do, make sure your contract permits you to look at each auditor's hourly production figures at the end of the count, while they are still in the store. Check these hourly figures against the sections they counted. Determine if the figures are feasible. For example, the auditor who counted the cigarette cartons and coffee aisle should have higher production figures than the one who counted the paper aisle. Periodically spot- check high achievers.

Lack of Good Business Ethics on Part of Owner of Inventory Auditing Service

An inventory service in the Southwest was doing a buy/sell audit for the owner of a supermarket. The $300,000 inventory was counted by three auditors in three hours! The buyer then brought in his hired service (six auditors who took five hours to count). A discrepancy of $20,000 between the two totals called for a recount by both services. The first service refused. Later it was discovered that the owner of the first service (20 years in business) had trained his auditors to count only the top shelf on each aisle, multiplying that figure by the number of remaining shelves.

Another unethical practice is to carry the previous inventory figures into the store. Numerous allegations have been made by storeowners and managers that these services have been caught adjusting questionable totals without recounting. You will read of an actual case in the article following. Apparently, the owner of the inventory service "fixed" the questionable totals on numerous occasions. He trained all his "partners" to do likewise.

A similar problem exists with inventory services that do not plot their inventory recap at the store, leaving the manager with only a total. At a later date, these services tally the figures and mail the results to the store.

When you don't compare section counts with previous counts before the crew exits the store, you are begging for mass manipulation of figures.

The most recent incident of this happening came to my attention one year in December. I had just conducted my advanced loss-prevention seminar for a regional chain of supermarkets in northwestern Arkansas. This chain was using an inventory service that brought in the previous inventory figures. I was told that at the end of their last inventory cycle, one store needed to be recounted. When the crew arrived for the second count, the crew chief asked, "How much difference are you looking for?" The loss-prevention manager replied, "That's none of your business." Rephrasing his question, the crew chief asked, "Then what should the last count have been?" Again, the loss- prevention manager said, "I told you that's none of your business. All I want from you is an accurate count!" The loss-prevention manager told me, "When the crew chief learned that I was not the store manager, that I was from corporate, you should have seen his face. I called his company, expressing my displeasure with his line of questioning."

Suggestion: When hiring an inventory service, ask the contact for a written code of ethics. Ask what happens when an employee is caught violating the code. Keep a copy on file and send a copy to each store. To verify that the code is more than words on paper, have your store managers casually ask each auditor 'the following questions, "Does your company have a code of ethics? Can you paraphrase it for me? What does your company do if the code is violated?" You will be pleasantly surprised how this line of questioning affects the immediate accuracy of the auditors questioned. Ask the service contact which items in the store are estimated and which are counted. An inventory service that tells you they "never" estimate should not be hired. Not only do they estimate, they are lying to you as well. Reputable inventory services do permit some estimating, yet they stay within their code of ethics. These types of estimates are controlled and do not affect accuracy. For example, when a box of bubble gum contains 480 pieces when full, it is ethical to estimate it as 240 pieces if it looks half-empty. Moreover, some dumped displays can be counted half way, then doubled, without affecting the tolerance of accuracy required for a good count. Get these specifics on paper before hiring the service. When the audits are taken, make sure the auditing crew is monitored by your manager to assure that only what has been agreed upon will be estimated.

Never lock the crew in the store at night to be left alone. If the crew is not continually monitored, you can be assured that even the best of inventory auditors will fudge occasionally.

Never permit the service to carry previous inventory figures into the store. If you discover a crew chief or auditor with previous figures, the headquarters of the inventory service should be considered a co-conspirator. Beware of the crew chief who asks for the book inventory figure before the count, or who asks the manager if he/she expects the inventory to be up or down. Tell your managers never to divulge figures in advance.

Demand that inventory figures (section by section) be plotted and totaled before the crew leaves the store. The manager should have a copy of the previous inventory on file. Only when the current inventory figures are plotted and totaled is the previous inventory recap produced by the manager.

The manager should then "walk the numerical audit trail" comparing section by section before the crew leaves the store. If there are sections that are questionable, you have the right, if your contract so states, to demand a recount of that section.

Inventory Auditor in Collusion with the Manager, Supervisor, District Manager

Even the best of inventory services may from time to time catch auditors in collusion with managers. One such auditor, who was employed by my inventory service in Texas, padded the inventory in a convenience store by $2,000 each month in return for half that amount in cash. To make sure the count balanced each month, the auditor accumulated the pad. For example, the second month was $4,000, the third month $6,000 and so on. After six months the owner of the c-store chain approached me and asked me to explain why a store that traditionally carried $30,000 in stock for years now carries $52,000. The investigation uncovered the plot.

An auditing firm in Ohio tells another story. Apparently, the store manager was scheduled for termination if his next inventory did not balance. The night before his scheduled inventory, he called the inventory crew chief at home, offering him several hundreds of dollars if he would pad the inventory a certain amount to save his job. The honest crew chief reported the bribe to his immediate boss, then to the store manager's supervisor.

In the northeast a supervisor of seven stores was in collusion with an inventory auditor. They were "drinking buddies." The retailer's policy was to never notify store managers or supervisors when their inventories were scheduled. The drinking buddy, who knew the supervisor was shifting stock between stores before each count, kept him informed of scheduled audits. Both were caught and fired, and the inventory service lost its contract.

The most widespread inventory fraud case involved a southern chain of convenience stores with outlets from Florida to California. This chain permitted its district managers to select their own inventory services. Three DM's in Birmingham, Phoenix and Little Rock were caught in collusion with the owners of local inventory firms. The inventory services in Birmingham and Phoenix padded the inventories to retain the business. The DM in Little Rock bilked his stores of over $200,000, while the auditing firm padded to cover the thefts. Without notice both the DM and the owner of the service suddenly disappeared. Six months later they surfaced in Pittsburgh, Pa. — happy owners of a store they had purchased for cash.

Suggestion: Before hiring an inventory service, ask what checks and balances it has in place to avoid collusion with your employees. Make sure you install your own checks and balances. Promptly investigate paper inventory buildup. When sales are continually below purchases and physical inventory stock has not increased, yet the paper inventory shows a steady increase, there is definite padding and possible collusion.

Have a binding contract with your auditing firm that states the consequences if their auditors leak inventory schedules. Consequences may include a financial penalty or termination of contract.

Single store operators and owners of small chains should personally select the inventory service. Demand the service be answerable to you alone and not to anyone else in the company. Large chains should make the inventory service answerable to the loss-prevention department only.

Sponsor Competition

The best way to encourage your inventory service to be conscious of its quality control is to sponsor competition. If you own less than 20 stores, you should periodically hire another inventory service to test the accuracy of your regular service. If you own more than 20 stores you should divide your stores between two or more services, periodically swapping the stores between services. Do not expect each service to charge equally. That is not your immediate concern. Hiring additional services will, however, keep their prices competitive. It will also cause each service to respond more quickly to your inventory needs.

Service Contract

A service contract should not give an exclusive right to one inventory service to audit all your stores. The contract should also include the responsibilities of your company, as well as the responsibilities of the inventory service. It should also demand that the inventory service purchase a performance bond.

Responsibilities of the Service:

1. Headquarters of the inventory service are not to give crew chiefs previous inventory figures.

2. Previous inventory figures are not to be carried into the store, are not to be hidden on the person of any auditor, are not to be kept in the memory of the calculator, and are not to be memorized.

3. Upon entering the store, the crew chief is to immediately introduce to the manager all new auditors who are in training, revealing their tenure with the company.

4. While the crew is preparing for inventory, the crew chief is to walk the store with the manager to familiarize him/her with store layout, making sure everything is in order for an accurate count.

5. No fraternizing between auditors and store employees.

6. Auditors are not to accept gratuities from any store employee.

7. Items consumed in the store by auditors must be paid for and receipts kept on their person.

8. Each auditor should carry a set of counting procedures, which detail what actions are to be taken if problems arise.

9. After the count is completed and while paperwork is being finalized, the manager is to walk the store with the crew chief to verify all sections have been counted.

10. After the paperwork is finalized, the manager is to produce the previous inventory recap and "walk the paper audit trail," comparing section by section. Any section not comparable is to be counted again by a different auditor.

11. At the end of the inventory, any cases or boxes carried into the store by the auditors will be opened for inspection before the crew leaves.

Responsibilities of the retailer:

1. The store should be prepared for inventory as to contract specifications. Even a reputable inventory service will not be able to count accurately if there are poor counting conditions.

2. To make the inventory service immediately accountable, the manager and/or supervisor should pre-count a few sections. Do not let the auditors know which sections have been counted. Post- counts after the crew exits the store are unfair to the auditors, because they will not be present to defend their count.

3. The manager should be encouraged to observe the inventory crew throughout the audit, doing spot-counts during the course of the inventory. This gives the manager an idea how the section counts should compare with the previous inventory, thus saving time with questions at the end of the audit.

4. If the section counts compare favorably, yet the inventory is substantially off book inventory, the auditing crew should be authorized to leave. The crew should not be expected to wait while the manager checks his/her paperwork for errors.

Inventory services are not your adversary. Most are legitimate, trying to service you property. Encourage your managers to be positive by finding them correct on spot checks instead of always accusing them of making mistakes. There will, however, be times when you find them in error. Yet, if most of the time they are correct, you should have confidence in them. On the other hand, if most of the time you find their counts in error beyond an acceptable percentage, your decision is simple. Hire a reputable service.

INVENTORY SERVICE SCANDAL ROCKS THE EASTERN SEABOARD

Food World, May 1991

Irregularities dealing with excess inventories in at least twenty Super Fresh stores have led to the most major shake-up in the history of A&P's Mid-Atlantic Group. According to sources both at Super Fresh headquarters in Baltimore and at A&P's corporate offices in Montvale, New Jersey, the problems stem from an alleged prolonged and systematic padding of inventories by a contracted inventory service at more than twenty Baltimore area stores.

The alleged villain was Accu-Rate, an inventory service from Towson, Maryland, contracted by the Group to count 26 Super Fresh stores every six weeks. When the Group discovered inventories were greater than the stores' carrying capacity, another inventory firm was contracted to do recounts, revealing significant shortages. A&P reports that more than $3 million of inventory is unaccounted for in the 26 stores serviced by Accu-Rate.

Sources tell us that while Accu-Rate's role is still being investigated, Super Fresh itself does not know over what period of time the alleged padding occurred, although we have been told it could have been ongoing for as long as three years. At this point the investigation has found no evidence of collusion or tampering with the company's records, yet a shake-up was triggered because inventory records were not scrutinized and reviewed thoroughly enough by Super Fresh executives.

"I'm fairly confident our people didn't defraud anybody," said an A&P executive with the Mid- Atlantic Group. "It was just plain sloppiness and negligence in not catching the pattern of padding. When the inventories grew as they had, in some cases way beyond the acceptable range, the pattern should have been caught. Beginning with the store managers, right on through to operations, loss- prevention and finance, the key personnel are given a copy of those reports. They should have been examined more thoroughly."

Another A&P executive said, "The whole episode is so unfortunate. So many good people have lost their jobs or been demoted. It's really a shame."

The alleged fraudulent counting practices of Accu-Rate have caused the following heads to roll at Super Fresh:

Charles Hofmeister, executive vice president of the Mid-Atlantic Group and one of the most popular executives in the marketplace, retired in May 1991. John Taylor, controller for the Mid- Atlantic Group and an A&P veteran with more than thirty years experience, has left the company. Also, Al Coste, the Group's Director of Loss-prevention has resigned.

Bill Crosson, most recently VP-store operations for the Group, is now VP-Baltimore division. Roy Ball, who was the VP of the Baltimore division, has been reassigned as a zone manager in the Baltimore area. Andy Baultins, zone manager for fourteen stores in the Baltimore area, is now store manager of Super Fresh at Ellicott City, Maryland. In addition, three store managers were terminated, but were later reinstated and assigned different stores.

Apparently, the hierarchy in Montvale (A&P headquarters) is not that emotional about this issue. Their feeling seems to be that it "happened on your watch," so those Mid-Atlantic executives now must pay the price.

Alan Brotman, president of Accu-Rate, was interviewed by Food World at his offices in Towson. Brotman said he has six other partners in the business and said that Accu-Rate was founded in 1988. He also said that he was associated with the company's predecessor firm, Accu-Count. In addition to the 26 Super Fresh stores, Brotman said he also takes inventories for Safeway and Valu Food. The company consists of only two full-time employees and about 45 part-timers.

Brotman claimed to know of no wrongdoing by himself or his partners. His "partners" are six individuals to whom he allegedly sold "franchises." The "franchises" are either under the Accu-Rate name, or other names. Brotman added that an investigation of several of his employees was ongoing.

"What do I have to gain by doing this? The fees that our company would gain are less than $5,000 ($1.65 per thousand dollars counted is $4,950). Do you think I would stake my personal and corporate reputation for that?" Brotman asked.

"Our work was never challenged by A&P. I told John Taylor that if he was ever dissatisfied with our inventories we'd do that store over at no charge. We never knew our work was being questioned until Taylor told us in early March (1991) that another company would be re-inventorying some of our stores. I would like the opportunity to defend myself and my company." Brotman said.

A&P/Super Fresh sources tell a different story. Accu-Rate's intentions may not have been to bilk the company of the $4,950 it overcharged by padding $3 million of inventory. Accu-Rate's scam, or at least the scam of its employees, was to carry the previous inventory figures into the stores. Being familiar with the Super Fresh system and armed with these figures, the padding was caused by estimating large sections of inventory, allegedly to increase profits by reducing man-hours.

This is precisely what the investigation revealed. In one store carrying an asset inventory of $507,000 (including an $81,000 backroom), Accu-Rate sent in a crew of eight auditors and walked out in three hours and fifteen minutes. This is an average of $19,500 counted per man-hour — an impossibility, according to other inventory services interviewed. The most experienced auditor can count $12,000 per hour with accuracy in a store this size, whereas the crew average should be around $10,000 per hour.

Accu-Rate's alleged scam was to make money on payroll reduction through mass estimations. "It may not seem like a lot at first glance," said a Super Fresh operations executive, "but if an average inventory costs $700 per store and a company knew the previous amount of inventory on hand, it could theoretically utilize fewer checkers . . ." Fewer checkers with less man hours means bigger profits for Accu-Rate, far greater than the $4,950 alleged overcharge the scam caused in padded inventories.

While the final chapter on this episode has not been written, it is clear A&P/Super Fresh has already begun to react in other areas of vendor fraud, particularly merchandise deliveries. With three years of padded inventories in the amount of $3 million, deliveryman theft would also go undetected.

Lee Easton, Super Fresh's VP-merchandising, has sent two memos to the vendor community detailing a new policy about DSD deliveries and fees that vendors will be charged if loss-prevention conducts investigations which result in theft or vendor misconduct.

A source at Super Fresh said that vendor abuse is not the issue in this case. "We just need to tighten all our areas of security within the company. This is definitely a preventative measure, although I will admit, because we do not have the depth of staffing in our stores compared to some other retailers in the market, the potential for DSD abuse is probably greater at our shop."

The episode created by Accu-Rate Inventory Service is not over, but the toll that it has already taken has been heavy. For a group of stores, that in 1989, was given the A&P "Chairman's Award" as the top producing Group and whose profit contribution was more than $17 million, a $3 million deduction is a major blow.

More importantly, men with stellar reputations, who have in many cases devoted their entire careers to A&P and/or the industry, have paid a far greater price.

Follow-up on the Investigation of Accu-Rate

Alan Brotman, president of Accu-Rate, hired David Gaine to sort out the mess. Gaine said, "We have been working hard to find out what the problem is and we have told Super Fresh we will provide any documentation of our past work that they might need. We want to cooperate completely with Super Fresh because our reputations are on the line. We've also initiated new safeguards to insure we will have a better accounting system internally. I can assure you that none of the partners (there are seven) were part of this situation."

A&P found this last statement to be false. After conducting its own investigation, A&P now has solid evidence implicating Alan Brotman and his partners. Several of his partners have confessed that they knowingly were creating fraudulent figures at the behest of Brotman. These confessions state that Brotman himself entered the stores from time to time and "fixed" the inventories, training his "partners" to do the same. A&P is considering legal action, and may attempt to go after the $1 million performance bond put up by Accu-Rate when it initially was hired by the retailer in 1988.

Brotman has lost his Super Fresh, Safeway and Valu Food contracts. Brotman, however, may still be in business. He did own several more inventory services under different names and at various locations in the northeast. They went by the names Kwik Inventory, Accountable, A-Plus, and Inventory Systems. Inventory Systems is apparently the umbrella "franchiser." These services may still be in operation.

Recommendations

Retailers, you are partially to blame for this unfortunate event. By chasing the cheapest inventory rate, you have created an untenable situation for legitimate services. For survival, many once-reputable services have had to rethink their commitment to accuracy. A healthy price for inventorying a $500,000 store is $2 per thousand ($1,000). A&P ran after the prostituted rate of $1.65 per thousand to save $175 per store. While $175 X 26 stores X 8 inventories per year X 3 years may have saved A&P $109,200, it cost $3 million in the process, not to mention the loss of A&P's top career employees at Baltimore.

This should not have happened and does not have to happen to your company. Take a good look at your inventory service. At the price you are paying, can the service really afford the time necessary to inventory your stores accurately? Follow the guidelines at the end of the previous article. Expose the frauds and expel them. Send us your stories. We will publish factual information and distribute it to every retailer in your area. Replace the frauds with two reputable inventory services at reasonable rates. Careful monitoring and exchanging of stores should keep both services in line.

OKLAHOMA-BASED INVENTORY SERVICE SUED BY TEXAS-BASED C-STORE CHAIN FOR MORE THAN $500,000 FOR INVENTORY AUDITING FRAUD

Case No. 153-162381-96 — District Court — 153^rd Judicial District

Tarrant County, Texas

August 7, 1998

Ft. Worth-based c-store chain

vs.

Jarman Services, Inc. d/b/a/ Jarman Inventory Services

August 7, 1998

The Operations Department of a convenience store chain headquarter-ed in Fort Worth, Texas became suspicious of the inventory figures turned in by Jarman Inventory Services. No way could their stores carry that much stock. Of course, Operations had been pleased with good inventories for several months running. But, how could c-stores built to carry $50,000 in stock, now hold inventories of $59,000 and growing.

Operations contracted another inventory service to inventory behind Jarman. Sure enough, the stores averaged $9,000 short.

In September, 1997, Attorneys for the Plaintiff, Hill Gilstrap, P.C. of Arlington, Texas, asked Jack Henry to stand as an expert witness in a court case entered by the Ft. Worth-based convenience store chain, against Jarman Inventory Services of Oklahoma. Henry declined because of his heavy seminar schedules, but did send the attorneys for the plaintiff the above information on Accu-Rate, which was read in court. Henry also recommended to the Attorneys of the Plaintiff that they contact as their expert witness Chuck Grubbs, former operations manager for The Pantry Stores of North Carolina.

Based largely on Grubbs' investigation of the plaintiff's operation, and his personal testimony on the witness stand, the c-store chain won a judgment against the Defendant.

FINAL JUDGMENT

On July 28, 1998, this cause came on to be heard for trial. (Name of C-store chain), the Plaintiff and Cross-Defendant, appeared in person and by attorney and announced ready for trial, and Jarman Services, Inc. d/b/a Jarman Inventory Services, Defendant and Cross-Plaintiff, appeared in person and by attorney and announced ready for trial. A jury consisting of twelve qualified jurors was duly empaneled and the case proceeded to trial.

After both parties had presented their evidence and rested and closed, the court submitted the questions of fact to the jury. After their deliberation, the jury returned with a verdict. The charge of the court and the verdict of the jury are incorporated herein for all purposes by reference. Based upon the verdict of the jury, and the agreement of the parties regarding the offset, the court finds that this judgment should be entered.

IT IS THEREFORE ORDERED that (name of C-store chain) have and recover actual damages from Jarman Services, Inc. in the sum of Four Hundred Twelve Thousand Eight Hundred Eighty Four and 20/100 Dollars ($412,884.20), that being the amount of damages found by the jury of $429,133.20, offset, by agreement of the parties, by the amount of $16,249.00, representing the final invoice from Jarman Services, Inc. to (name of C-store chain).

IT IS FURTHER ORDERED that (name of C-store chain) recover from Jarman Services, Inc. pre-judgment interest on the foregoing damages in the amount of One Hundred Six Thousand Six Hundred Seventy Two and 76/100 Dollars ($106,672.76).

IT IS FURTHER ORDERED that (name of C-store chain) recover from Jarman Inventory Services, inc. the sum of $40,000, as reasonable and necessary attorneys' fees for services rendered in the event that Jarman Services, Inc. files an appeal to the court of appeals, but such appeal is ultimately unsuccessful.

IT IS FURTHER ORDERED that the judgment here rendered shall bear interest at the rate of ten percent (10%) from August 7, 1998 until paid.

All taxable costs of court expended or incurred in this cause are adjudged against Jarman Services, Inc., Defendant. All writs and processes for the enforcement and collection of this judgment or the costs of court may issue as necessary. All other relief not expressly granted is denied.

SIGNED the 7^th day of August, 1998

KEN CURRY — JUDGE PRESIDING.

AGREED AS TO FORM

Robert R. Bodoin & Stefanie Martin Klien

HILL GILSTRAP, P.C., 1400 West Abram Street, Arlington, Texas 76013

Tel: (817) 261-2222 — Fax: (817) 861-4685

ATTORNEYS FOR PLAINTIFF

GLENNIS SIMS, P.C., 2603 Oak Lawn Avenue, Suite 250, Dallas, Texas 75219

Tel: (214) 559-3338 — Fax: (214) 559-3717

ATTORNEY FOR DEFENDANT