Selling Stuff

June-September 2019

Internal Controls When Selling Stuff

Some groups make significant money from selling stock. Running a bar is a common fundraising activity for sports clubs, while others sell branded merchandise. There are not-for-profits who are manufacturing items for sale, such as traps used in environmental pest control, and many PTAs sell school uniforms. With ‘Social Enterprise’ being a buzzword in the not-for-profit sector at the moment, many organisations feel they need to be more, well, enterprising, and engage in such activities.

However, there is a high risk of fraud associated with such activities, if no procedures are put in place to keep an eye on stock and sales. Some of the risks are:

• Stock being taken for private purposes.
• Stock being sold, but the money pocketed by the seller and not banked.
• Materials being bought on organisation’s account, but used for private purposes; or the finished goods are sold outside of the organisation.

The key control to detect such fraud is the link between stock and sales. Most not-for-profits are too small to have electronic inventory systems which can account for each individual item of stock, however tills with point-of-sale software can do a good job in tracking what was sold, and how much money was taken.

When we audit such activities, more often than not we have to ‘qualify’ the audit report, meaning we put in a caveat that we are unsure about this part of an organisation’s activities. This is often because our attempts to analyse stock movement and link it to sales is thwarted by the organisation’s internal use of stock items. For example, uniforms and branded merchandise may be both sold and used for internal purposes, but there are no separate stock ‘piles’ for the two. In the case of PTAs, there is usually a mix of donated and purchased uniforms being sold (as well as sales on behalf of a parent), which makes it difficult or impossible for us to accurately assess the total amount of stock the organisation acquired over the year if there is no stock register..

To avoid, or at least detect, fraud, a few things have to be in place:

• An accurate stock register, which records on a regular basis the stock being purchased (or donated), sold, or taken out of inventory for other purposes (such as internal, or marketing).
• Stock counts: For bars, this should happen far more often than once a year. The purpose of a stock count is to compare the actual stock with what is recorded in the stock register.
• Separation of duties: The person in charge of stock (i.e. stock counts and the stock register) should not be the same person selling it – this would allow an easy way to manipulate the stock register.
• Reconciliations: Someone needs to compare takings with stock movement to see if money, or stock, has gone missing. Again, this person should not be involved in selling stock.