HAVE YOU INFLATED THE STOCKS of your company?
Accounting is a very useful tool to know the financial status of a company, but also to make them up. A trick to make up accounting is to artificially increase inventories.
In this article, we will see how to detect if a company has camouflaged or falsified its real stocks.
Stocks in accounting
Accounting Makeup
Some companies, especially if their accounts are not audited, may show a made-up accounting.
In fact, one of the most used techniques is to retouch the value of stocks upwards to present a better result and prevent banks or suppliers from cutting credit.
For example:
A company keeps obsolete goods in its inventory (while in previous years it cancelled them and calculated the corresponding loss).
A company calculates in its year-end inventory goods acquired at the beginning of January (which is when it accounts for the corresponding purchase).
Immediate effect on the company’s accounts
These changes have an immediate effect on the company’s results.
Fictional increase in stocks
See a concrete example if these “techniques” involve an artificial increase in stocks of 50,000 euros:
| Concept | Normal situation | Manipulated situation |
| Sales | 1.200.000 | 1.200.000 |
| Shopping | -900.000 | -900.000 |
| Stock Variation | -10.000 | 40.000 |
| Gross margin | 290.000 (24,16%) | 340.000 (28,33%) |
1. The actual final stocks decreased compared to those at the beginning of the year by 10,000 euros.
However, that figure is manipulated at 50,000 euros, resulting in an increase in final stocks of 40,000 euros.
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How to detect the increase in stocks
Compare annual balance sheets
If a client presents your balance sheet and your income statement for a single year, you will not have it easy to detect these manipulations.
Request data from at least the last two years (in fact, the annual accounts already present them), to compare and be able to draw conclusions.
In this way:
Increase in stocks.
Be suspicious if in the last year there is a significant increase in stock compared to the previous year and without apparent relation to an increase in sales.
Normally, the proportion between stocks and sales remains similar from one year to another.
Increase in margin
Another indication that there may be manipulation is the increase in gross margin (sales minus cost of sales) from one year to the next.
It is noted that in the case of the example it goes from 24% to 28%.
Well, if every year it was close to 24%, that will be an indication that the stock valuation “policy” has changed!
Sector Margin
Compare your customer’s gross margin with that of other customers in the same sector and size.
If you do not have data from other customers, remember that commercial reports usually provide this sector information.
It doesn’t snee
Your client may tell you that the increase in stock derives from an extraordinary order made at the end of the year (to take advantage of an offer, for example).
This explanation will be credible if the gross margin is similar to last year (since the increase in inventories will have been offset by an increase in purchases).
But if the factors indicated in the previous point occur (increase in stocks and gross margin but with sales similar to those of previous years), ask for explanations and be restrictive when granting credit to this client.
If you notice that your client increases the final stocks and the gross margin but his sales figure is similar to that of previous years, ask for explanations, since the final stocks could be inflated.
