Inventory Chicanery Tempts More Firms, Fools More Auditors

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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
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"The auditor was either taken in or missed the obvious," Mr. Turbidy says. "Giving the auditors the benefit of the doubt, I assume that it was inexperience on their part because some who showed up at Laribee's plants were fresh out of college. Otherwise, how could they have overlooked such blatant inventory manipulations?"

James T. Simmons, Laribee's former vice president for operations, says a firm later merged into Deloitte sent "three to five auditors with three years or less experience to the [Camden, N.Y., and Jordan, N.Y.] plants to check inventory." He recalls: "The faces kept changing and there was little continuity." According to several Laribee employees, a standing joke at the plants was that the next outside auditor "would be fresh out of high school." Mr. Simmons adds that Mr. Dobrichovsky "never showed up at the plants" during annual inventory counts.

Mr. Dobrichovsky, who left Deloitte at the end of 1990, declines to comment. Deloitte denies any wrongdoing and says the audits "were done in accordance with professional standards."

In any event, the Laribee case isn't unusual. Experts say many companies overvalue obsolete goods and supplies. Others create phantom items in the warehouse to augment the assets needed as loan collateral. Still others count inventory that they pretend they have ordered but that will never arrive.

In recent years, lawsuits have

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