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JFC
25,2 Inventory control weaknesses – a
case study of lubricant
manufacturing company
436 Norazira Abd Karim and Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia, and
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy, Universiti Teknologi MARA, Perak Branch,
Tapah Campus, Malaysia

Abstract
Purpose – For a manufacturing company, inventory control and management is crucial to ensure smooth
production and sustainable sales performance, as well as preventing stockout that will result in customer
switch to competitors. This paper aims to examine the effectiveness of cycle count activities, one of the
inventory control tools to manage inventory. Beside, this study also wishes to identify any loopholes in
practices and procedures in inventory control of companies.
Design/methodology/approach – One of the lubricant manufacturing companies in Malaysia was
selected as a case study and mixed method data collection of document analysis and observation were used.
The analysis and examination was conducted by using Committee of Sponsoring Organization of the
Treadway Commission Framework 2013 as guidance.
Findings – This study found that problems in inventory control can be caused by inconsistency of practices
due to incomplete or absent standard operating procedures. Furthermore, no segregation of duties and
excessive reliance on one person to conduct many tasks will lead to human error and fraud.
Research limitations/implications – This paper enhances the theoretical understanding on the
inventory control and management system applied in the manufacturing organization particularly. However,
frequent changes of the management in the organization of the case study make the study difficult to obtain
consistent information. Not all standard operating procedures were revised or updated and available for
examination. In addition, some of the reports needed for investigation are confidential and requests to observe
and scrutinize information from those documents are denied by the company. Thus, more in-depth analysis
and verification on the issues of interest were unable to be conducted.
Practical implications – This study provides an indicator that cycle count activities need to be
conducted frequently on a regular basis so that the physical inventory and recording system are accurate.
Cycle count activities also must involves various related departments in the company in which regular
training is essential to ensure employees are aware and understand their responsibility and accountability on
the inventory.
Originality/value – This study is original as it focuses on the inventory control management of one of the
largest lubricant manufacturing in Malaysia, particularly on cycle count activities which is scare in literature.
Furthermore, the company allows research access to the documents and operations conducted in the
company, which is usually difficult to obtain from many companies.
Keywords Case study, Malaysia, Fraud, Internal control, Inventory management, COSO framework
Paper type Case study

Journal of Financial Crime

Vol. 25 No. 2, 2018
pp. 436-449
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2016-0077
Introduction
Important balance sheet items include assets. Assets are the most important thing in
any organization. Presentation of assets in financial statement can be divided into two,
which are non-current assets and current assets. Non-current assets are also known as Inventory
fixed asset, where the values are very high and useful life is more than one year. control
However, a current asset has a useful life below than one year. Examples of current
assets are inventory, account receivable, cash in hand and cash in bank. Current assets
weaknesses
are more liquid compared to fixed asset, meaning that they can be converted into cash
in a short period. Therefore, management of the current asset items like inventory or
stock is very important to ensure good performance of the company (Elsayed and
Wahba, 2013) because inventory forms a significant portion of the current assets or 437
equity for many organizations (Filbeck and Krueger, 2005). Rajeev (2008) suggests that
business will face a significant loss if there is a failure and incompetency in overseeing
inventory management. Besides, managing inventory demands huge investment such
as large warehouses. Wrong investment decisions will pull a company to the brink of
loss. In addition, investment in inventory management is not an everyday expense.
Instead, the expenditure incurred remains fixed for a long period (Dennis and Meredith,
2000).
Unfortunately, there are many issues in inventory management that occur in an
organization, especially for the manufacturing type of company. For example, Albrecht et al.
(2011) suggest that frauds in inventory have been such a common problem for business that
trim down company’s profit figures. Based on KPMG (2009), theft of inventory recorded the
second highest type of fraud incurred by Malaysian companies of 31 per cent, just behind
theft of cash at 39 per cent from overall types of fraud perpetrated. Another survey
conducted by the PriceWaterhouseCoopers (PWC Malaysia, 2016) found that asset
misappropriation was the most economic crime reported at 57 per cent, while procurement
fraud was 17 per cent. Based on the respondents of the survey, majority of the assets
misappropriations were done via false invoicing and straight-out theft. The respondents
also added that inventory and supply chain are particularly vulnerable for re-sale or to be
sold as scrap.
Inability to manage inventory efficiently also will create problems in the company
such as decreasing in productivity, error in manufacturing of unwanted items,
shrinking in the levels of customer commitment, the accumulation of inventory
handling costs, moral tensions, frustration and too much significant unwanted cost to a
company (Rajeev, 2008). Due to this, many companies have started to focus on the
improving the effectiveness of internal control system of inventory management. Siali
et al. (2013), for example, suggest that companies need to install computer-based
software systems to control inventory level, which are to be integrated with the supply
chain management.
However, many companies only emphasize the optimum level of the inventory,
safety stock, cost incurred on holding inventory and time of delivery. A majority of
companies lack focus on standard operating procedures and cycle counting activities.
These activities are important because they are able to prevent cost increase due to
wastage, bottleneck and many other non-value added activities that can reduce the
profitability of the company. For instance, cost on stock obsolescence and cost in
holding the inventory are major costs that need to be monitored and controlled. Poor
timing in purchasing perishable raw materials will risk company loss of huge of money
due to obsolescence and damaged product. Owoeye et al. (2014) concur that the cost of
purchasing and holding inventory can account for as much as 60 to 80 per cent of the
total cost of a product or service.
Besides, there are also many instances where staff do not want to be responsible but
accuse others for excessive and uncontrollable inventory cost. This occurs if standard
JFC operating procedures are incomplete or non-existence. Hence, several actions need to be
25,2 taken to avoid blame game between staff and departments regarding cost incurred or issues
of poor inventory management that can result in loss of customers.
Based on this, it is interesting to explore and examine the weaknesses in the inventory
management and control in the company. Not many studies have been conducted to
examine the inventory management of the discrete components on inventory (Chapkun
438 et al., 2009). Empirical research shows that good inventory management is able to shape the
performance of the company (Koumanakos, 2008; Cheung et al., 2004; Shin et al., 2015; Mittal
et al., 2014) because all the associated costs related to inventory like storage costs, insurance
costs, ordering costs, obsolete stock and other relevant costs will be at a minimum (Samad
et al., 2006).
The purpose of this study is twofold. First, this study intends to examine the
effectiveness of the cycle count activities and, second, to identify any loopholes in practice
and procedure on inventory management of the company. Specifically, this study intends to
answer the following research questions:
RQ1. How effective are cycle count activities adopted in the inventory control and
management of the company?
RQ2. What are the weaknesses in the practices and procedures of the inventory control
and management of the company?
One company involved in manufacturing and distributing lubricants in Malaysia was
selected as a case study for this research. This study encompasses the overall picture in
supply chain department which is responsible to manage and receive raw materials, transfer
finished goods from production to warehouse and supply finished goods to the customer. It
includes the standard operating procedure used by this department as well as the company
and analyses the trend of stock losses from 2008 to 2012.
This study will contribute in several ways. First, findings of this study can assist the
company in a proper re-engineering of the process and procedures that need to be done to
improve the efficiency and effectiveness of the inventory management and consequently,
the performance of the company. Second, this study also will help the staff of the company
selected as a case study to obtain more information and data to improve standard operating
procedures. Due to limited human resources, the information needed was previously
unavailable. Finally, this study will add to the body of the literature on the problems and
possible solutions for the weaknesses in the inventory control system which is scarce,
particularly a study that used a case study approach in a manufacturing-based company
and operates in a developing country like Malaysia. In addition, this study also uses COSO
Internal Control – Integrated Framework 2013 as a basis of its analysis. Thus, this paper
will enhance the theoretical understanding on the inventory control and management
system applied in the manufacturing organization.
The next section is literature review, followed by research methodology. Findings and
discussion are given next. The last section contains the conclusion, implications of the
research and limitations.

Literature review
Internal control in inventory management
The Committee of Sponsoring Organization of the Treadway Commission (COSO) describes
internal control as policies and procedures established by an organization with the purpose
to manage the risk and provide reasonable assurance that the company will be able to
achieve its pre-determined objectives and sustain the company performance. To succeed, Inventory
this process must be inclusive, not exclusive, meaning that all personnel in the organization control
irrespective of their level and position must be involved and take charge in internal control
(COSO, 2013).
weaknesses
There are many researchers that provide empirical findings on the benefits of internal
control. Effective and efficient internal controls will promote and encourage staff of the
organization to manage managing resources accountably (Asare, 2009), promote efficient
operation via reduction of bottleneck and non-value added activities (Feng et al., 2014), 439
prevent personnel from involving in risk-taking decision and behaviour (Jin et al., 2013),
maintain smooth and increase cash-flow predictability (Altamuro and Beatty, 2010) and
ensure compliance with laws, guidelines, rules and regulations.
In addition, apart from providing a reliable system, internal control can also benefit
organizations through proper safeguarding of assets, accomplish budgetary objectives,
forbid and combat error and fraud committed by the internal and external individual (Allen
et al., 2013). Furthermore, waste can be reduced to the most minimum level and information
can be acquired reliably, accurately and quickly for precise decision-making (Allen and
Tommasi, 2001).
On the contrary, internal control weaknesses will invite many problems to the company.
Poor internal controls will grant an opportunity for fraudulent and malpractices activities to
take place (Skaife et al., 2013; Omar et al., 2016; Zakaria et al., 2016), lead to reduction in sales
(Su et al., 2014), link with non-compliance with rules and regulations (Rahim et al., 2017),
damage future financial and operational performance (Weiss, 2014), associate with higher
private control benefits (Gong et al., 2013), reduce the market value of the company (Hu et al.,
2013), cause low reporting quality (Ghosh and Lee, 2013), receive negative capital market
reactions (Nishizaki et al., 2014) and be a red flag for fraud (Simser, 2014).
There are many examples of internal controls that can be implemented by the company
in managing their inventory. These include maintaining catalogue or documents for every
item, using bar code and radio frequency identification tags to track stock movement
(Talavera et al., 2015), installing enterprise resource planning technology to immediately
alert managers of potentially cost overruns (Suhaimi et al., 2016) that possibly causes by the
inventory, proper numbering of every items, maintaining up to date inventory records,
periodic audit of materials and performing cycle count activity at regular periods. This
research will focus on the cycle count activity.
Cycle count or stock count activity is usually conducted in the year end of financial
statement. Cycle count activity can be one of the effective ways to monitor inventory and
keep the stock in control. It prevents inventory record inaccuracy that can cause losses
(Chuang and Oliva, 2015). Cycle counts can be conducted monthly, quarterly or yearly. It
depends on the policy of the company itself. A cycle count is the process of counting the
physical inventory and comparing the amount with the record in the system. The more
frequent the stock count, the more accurate the quantity of the stock in the system. Some
companies do the cycle count on a monthly basis, some do it on quarter basis and some on a
yearly basis.
Process of cycle count depends on some criteria. The first is type of inventory. Inventory
can be categorized into finished goods, packaging material or raw material and work in
progress. Second, quantity of the inventory. The person in charge needs to identify the total
quantity of the inventory to be counted for allocation of staff involved. Besides that, they
also need to identify the measurement unit for item to be counted, whether in kilograms,
metric tonnes, litre, bottles or other measurements. Then is the number of warehouses and
locations. These criteria are important to help the company to allocate number of staff
JFC involved and possibly time to be spent in the inventory location and to get approval from
25,2 third party, if any, to be ready in the cycle count activity. If the location is outside or in other
state, an appointment is needed and requests for travelling expenses for the staff will be
submitted. Fifth, number of employee involves. It is important for sufficient manpower to
ensure the process of cycle count can run smoothly. Finally, it is the cut-off date. The cut-off
date will involve every department related to the inventory. Cut-off date must be followed by
440 every department to ensure no huge discrepancies during reconciliation and the data used
for comparison between system and physical are accurate.
Process of cycle count activities does not only involve physical count done by the staff
but will continue with the reconciliation for any discrepancies. Reconciliation will be
conducted by respective the staff that manages the inventory. All the reconciliation must be
verified and approved by the head of department itself and submitted to the finance
department for adjustment within one week after the day of cycle count activity. Report for
adjustment must get approval as stated in standard operating procedure (SOP), depending
on the range to give approval. For instance, based on the practice of the company that is
selected as a case in this study, if the value of the adjustment is RM100 000 or less, it can be
approved by the General Manager. An adjustment value from RM100,000 to RM500,000
requires approval from the Executive Director. Finally, an adjustment value of more than
RM500,000 needs to be approved by the Audit Committee. Basically, limits of approval are
different between companies. After getting approval, adjustment on the system will be done
to ensure physical items are the same with the system.

Benefits in inventory management

Ballard (1996) classified inventory into three main groups, namely, raw materials, work in
progress and finished goods. Raw materials are components such as goods, materials and
stock that are purchased or bought by an organization. Products in the work in progress
group are items that are partly completed. It is also known as semi-finished product with a
potential further value added in future manufacturing or modification. Finally, finished
goods are completed products ready to sell in the market.
Rajeev (2008) claimed that effectiveness of inventory management is able to influence
solid company financial performance and create competitive advantage for company
survival in the business. This is because any approach and efforts taken to manage
inventory will directly affect working capital, production and finally customer service and
sales of the company. Efficient inventory management can assist the company to smoothly
deal with their inventory affairs (Siali et al., 2013). Hence, with a smooth management and
operation, company able to reduce the inventory lead time and subsequently improve the
goodwill and competitive advantage while at the same time gain the trustworthy and
loyalty from the customer (Wallin et al., 2006). In contrast, failure in managing inventory
could cause increasing number of stock losses, failure in delivery of goods and may lead to
shut down of production and other implications unfavourable to the performance of the
company.
All these events will increase operation costs that can reduce the profit of the
organization. Effectiveness of managing inventory in a lubricant type of company is very
important, and it must have a complete standard operating procedure to ensure
effectiveness. At the same time, the employees need to follow the standard operating
procedure provided by the company.
Examples of the effectiveness in the inventory management system can include
maintaining sufficient stock of raw materials in the period of short supply, anticipating
accurate price, ensuring a continuous supply of raw materials to production department
facilitating uninterrupted production, minimizing the carrying cost and time, ensure the Inventory
finished goods are available for delivery to customers to fulfil orders, smooth sales operation control
leading to efficient customer services, minimize investment in inventories, proper control at weaknesses
an optimum level and protecting the inventory against deterioration, wear, tear,
obsolescence, unauthorized use and fraud. To be effective, supply chain management
department must have proper planning to manage the inventory. For example, the supply
chain management department must able to decide and forecast stock replenishment level, 441
optimum level of stock and accurate stock quantity required.
There have been several studies conducted to examine the influence of inventory
management on the performance of the company. Koumanakos (2008) found company that
involved in food, textiles and chemicals manufacturing in Greece has better rate of returns
arising from lean operations and effective inventory management. In the USA, Shin et al.
(2015) found that a company with higher inventory to sales ratio also has a higher profit
margin. Interestingly, they also discovered that small size firms reap more benefit than
larger firms from superior inventory efficiency. Mittal et al. (2014) also found a company
involved in fertilizer-based production that recorded lower average inventory conversion
period, which indicates fast stock movement also reported decent profitability figures. In
short, many prior researchers have shown that company’s performance can be improved as
a result of better and more efficient inventory management (Koumanakos, 2008; Cheung
et al., 2004; Shin et al., 2015; Mittal et al., 2014; Samad et al., 2006; Çelebi, 2015; Fu et al., 2015;
Fan et al., 2015).

COSO internal control – integrated framework

This study used COSO Internal Control – Integrated Framework 2013 as a basis to assess
the effectiveness of the cycle count activities and guidance to identify any loopholes in
practices and procedure in the inventory control management of the selected case study. It is
selected because this framework is widely applied by many organizations across the world.
This framework also highly recommended by the Securities Commission of the USA to be
adopted because other frameworks are not extensively applicable (Cendrowski and Mair,
2009). In addition, this framework has been in existence for more than 20 years (since 1994),
showing its credentials and relevance throughout the period.
Based on the COSO Framework, internal control system framework consists of five
interrelated components that can be applied in various organizations types of organizations
either public or private, small, medium or listed companies. These components are control
environment, risk assessment, control activities, information and communication and
monitoring activities. Among these components, control environment arguably is the most
fundamental and important, as it is involved in establishing comprehensive standards and
process and underpinning the implementation of the internal control in the organization
(COSO, 2013). All these five components are further divided into 17 underlying principles
extended into 77 point of focus (POF). This paper, however, only explains and applies the
relevant POFs related to the findings of the research.
This framework provides invaluable guidance to companies generally and boards of
directors particularly in establishing safe and sound internal controls as well as the proper
and right ways for evaluating the effectiveness of the internal control implementations. It
suggests a comprehensive and robust integrated internal control to prevent organizations
from unnecessary mistake and blunder. In worst case scenarios, good internal control can be
a solid shield to fraud and unethical conduct.
JFC Research methodology
25,2 This research uses a case study approach because it allows in-depth and detailed
understanding about problems (Miller and Brewer, 2003) and permits real settings and
actual practices to be investigated (Smith, 2015). Besides, this approach is most suitable
ways to investigate and examine poorly known and hardly understood environments
(Leedy and Ormrod, 2005), which are cannot be accessed through normal research processes
442 like survey and archival records that are publicly available.
This study also uses mixed method of data analysis, namely, document analysis and
observation. Brewer and Hunter (2006) suggest that using more than one method in
collecting data allows a study to compare and verify the accuracy of the information and
thus increase the reliability and validity of the findings because bias and mistakes due to
over-depending on a single method can be avoided (Yin, 2012).
Data for document analysis were collected from various documentations, reports,
financial statements, standards, procedures, guidelines, inventory record, report of stock
loss, stock take report, papers and archives of the information available in the company. To
enhance the reliability and validity of the findings as well as to get rich view and
perspectives, data collection was also expanded to observations. This includes observation
on the process in supply chain management that involve transferring of finished goods from
supply chain management to third party warehouse, receiving of finished goods from
production and receiving and transferring of raw materials. Observation was also conducted
during the cycle count activities most recently held in the company. The data collected were
analysed in the three consecutive stages, namely, data reduction, data display, and data
conclusion (Malhotra, 2010).

Description of the study case

The company selected in this research is involved in manufacturing activities and known as
ABC Sdn Bhd. This company is selected because it allows research access to the documents
and operations conducted in the company, which is usually difficult to obtain from other
companies. Due to confidentiality, the real name of the company was not disclosed. ABC Sdn
Bhd is a subsidiary to a government-linked company in Malaysia involved in automotive
equipment, manufacturing and engineering and oil and gas. ABC Sdn Bhd activities related
to manufacturing and distribution of lubricant product in Malaysia as well as Asia. The
company manufacturer and deliver a wide range of lubricant solutions and services to the
automotive industries. Products manufactured by ABC Sdn Bhd are passenger car motor
oil, diesel engine oil, motorcycle oil, gear and transmission oil, industries and marine oil and
specialty products. Besides that, there are another two companies that are related to ABC
Sdn Bhd. Both companies are distributors for specific products that are manufactured by
ABC Sdn Bhd.

Findings and discussion

Effectiveness of the process of cycle count activity
There are two ways stock count activity can be conducted. First, when it is requested by
Finance department or auditor and, second, when it is conducted as the usual or routine
standard process in supply chain management. Even though there are two types of stock
count activity, the final result must be submitted to the finance department for the review
and analysis of the results.
The initial step of the stock count activity begins with the discussion between finance
department and supply chain management. The purpose of this discussion is to request and
plan for the stock count activity arrangement and decide the tentative date for the activity.
The finance department then will distribute internal official memo to all departments to Inventory
inform the staff about the stock count activity. The memo will state the date of stock count, control
cut-off time of the system such as cut-off sales order and production shutdown followed by
the resume date. The memo also will confirm the number of staff needed from various
weaknesses
departments to help supply chain management department in conducting stock
count. Then, on the day of stock count activity, all the staff involved will count the stock
based on the area assigned to them. At the end of the day, the result of stock count will be
submitted to the finance department with verification from supply chain management 443
department. The staff for the finance department will key in the results received from staff
and make a comparison between the record in the system and actual physical stock.
The other method for stock count is more simple and straightforward. This count
activity and process will only involve staff from supply change management. The stock
count activity is conducted on a monthly basis to ensure the total inventory in the
company’s system and records always tally and accurate.
Based on the examination, this study found that in 2008 and 2009, supply chain
management held cycle count on quarterly basis. However, in 2010, they only conducted two
cycle counts, and it reduced to merely yearly basis in 2011 and 2012. Changes on this trend
also change the result of cycle count from year to year. The result did not improve but
become worse and turn out to be a major contribution to the reduction of profit for the
company in the financial statement. This situation is related to POF 22c – Considers the
required level of precision. When fewer stock count activities are conducted, fewer corrective
actions can be taken to prevent stock losses. In addition, the inventory figure recorded by
the company is different than the actual physical stock present in the premises of the
company. Thus, it reflects the inaccuracy and misleading figures of the company’s financial
statement. Worsen, the users of those financial statements may engage in wrong decision-
making.
This study also found that there are many problems that arise during cycle count
activities such as improper count sheet, no specific location for every inventory, mixed types
of inventories in one place, insufficient staff to coordinate the stock count, no cooperation
from other department, an irresponsible person in discrepancies, improper reconciliation
and inaccurate submission of a report to finance department. These problems may be
connected to POF 52 – Performs using competent personnel. As the cycle counts activities
not properly executed, the competency and skill of the person responsible to handle and
organize this activity is questionable. The responsible personnel also failed to find an
appropriate solution to the above-mentioned problems.
This study also discovered that the company only begins the cycle count once requested
by external auditor. There is no specific schedule provided by supply chain management for
cycle count activity. Even if they do an internal cycle count, no final results are submitted to
the finance department for adjustment. Thus, all the adjustments will be carried out on the
yearly cycle count and the amount will be huge. Consequently, lump sum figures will
materially affect the financial figure especially in the cost of sales. This situation is
contravened with POF 50 – Performs in timely manner. COSO Framework highly
recommends organization to deploy control activities systematically with proper planning.
In this situation, pre-determined and regular cycle count activities will ensure that
weaknesses can be identified at the earliest time possible so that practical solutions can be
taken before those weaknesses become huge and bring disaster financial losses. For
example, stock losses will not affect the company very much if monthly provision was
provided for any losses, and all the cost incurred at year end will be reversed out from the
provision.
JFC This study found that there is no awareness about fraud schemes either in financial
25,2 statements or other work-related matters, inconsistent with POF 31 – Considers various type
of frauds. The company should have a mechanism to prevent and detect any types of fraud
and malpractices that related to inventory activities. There are numerous potential
inventory-related fraud schemes. One of them is double counting, which frequently occurs in
ABC Sdn Bhd. Double counting exists when specific items are counted twice because there
444 is no specific place for same item during stock count. This may result when a company
moves inventory from one location to other location at which this inventory already counted.
Because of this, it opens doors to a manipulation of financial record because an employee
may send a fake report on the new inventory that actually being stolen or not anymore
available in the premises.

Practices and procedures of inventory control and management

Delivery of packaging materials from supply chain management to plant. One of the
processes involving inventory management in supply chain management is transferring
packaging materials to the plant to support plant for them to produce the product according to
the schedule. In this process, it involves sales, planning, procurement and supply chain
management. The processes start with the sales department where sales executive will send
the sales projection to supply chain management to analyse existing physical stock in the
warehouse. A supply chain management executive will do the analysis and planning to order
sufficient materials. Then, the executive will send the request to production planning to
produce the product within the time frame. After receiving the request, the production planning
will plan the schedule and update the quantity of materials that production needs to produce
the product. Production planning will inform supply chain management executive about the
quantity of materials. The executive from supply chain management will again do the analysis,
but this time for raw materials. Afterwards, the supply chain management executive will send
order quantity to procurement department to order the materials needed.
This study found that this company did not have any proper standard operating procedure
for the process, incompliance with COSO recommendation of POF 48 – Establishes policies and
procedures to support deployment of management’s directives and POF – 49 – Establishes
responsibility and accountability for executing policies and procedures. The fundamental
important of having standard operating procedure is it make easier for the employee to conduct
their task, consistent output produced and reduce errors or variation from the benchmark and
quality expected. In ABC Sdn Bhd, poor standard operating procedures lead the people
involved in this process makes orders verbally and production will process the product on ad
hoc basis. This will affect the production time, and many unscheduled request were initiated,
which interrupt the normal activities of the departments involved and translated into the loss of
valuable time, productivity and money of the company.
Storage of base oil at third party’s tanks and delivery to plant. Effectiveness of inventory
management can ensure a continuous supply of raw materials to production department
facilitating uninterrupted production. Therefore, supply chain management must manage
the inventory properly within the storage capacity so that they have the space to store the
inventory. In ABC Sdn Bhd, there are two classifications of raw materials which are
additives and base oil. Additives will be delivered by supplier directly to the company.
However, due to a minimum storage tank, the entire new base oil delivered by supplier will
be sent directly to the third party warehouse. The base oil will be sent to ABC Sdn Bhd only
when needed. In this process, when the materials arrive at the third party warehouse, supply
chain management supervisor will generate goods receipt note and key in the info into the
system.
 This study found that there was no proper documentation provided by the third party’s Inventory
personnel on the receiving of materials and no close supervision from ABC Sdn Bhd. This control
was evidenced by the increase in the number of base oil losses from 2010 to 2012. The
number of losses mainly came from the third party’s warehouse. It can be detected during
weaknesses
year-end stock take activity. This is inconsistent with the requirements of POF 41 –
Evaluates a mix of control activity types. For the critical task-like storage of hugely perishable
product, the organization should use variety of control and monitoring to prevent
organization from huge stock losses. Apart of accurate record and proper credentials, the
445
organization should hire dedicated personnel to observe the activities in the warehouse and
report to the headquarters promptly if any unusual activities occurred. This ensures
immediate remedial efforts can be taken to avoid any adverse impact to the organization.
Base oil losses normally come from usage or wastage during operation process such as
the transfer of oil from tank to other tank. Acceptable industry rate for this is only 0.5 per
cent. From Table I, the percentages of base oil losses from 2008 to 2011 were below the
average industry rate. However, for 2012, it was slightly higher than the industry rate of
0.68 per cent, which is more than 0.18 per cent. The other concerns was the loss value
percentage show an increasing trend from 2009 of 0.18 per cent loss value percentage up to
0.68 per cent in 2012. This shows that no early corrective action was taken by the company
to rectify and investigate the problems.
This study also found that several aspects were overlooked by management, such as no
monthly reconciliation done in 2012 and purchasing of stock based on offer, not the level of
inventory. The reasons given for why they bought the base oil based on offer is that the price
of this material fluctuated in 2011. This indicates that the company has poor inventory
management in forecasting and projecting the movement of future price. They also do not
use a hedging technique to buy the base oil which exposed the company with unpredictable
cash outflow and possible selling product at loss if the sales price is not adjusted according to
the price of the raw materials. This is inconsistent with POF – Determines how to respond to
risks. As the economic and business environment nowadays is unpredictable and volatile, the
organization should use risk management tools like ERM (Enterprise Risk Management) to
manage risk. In addition, the company needs to actively identify and forecast any risk that
will impact the organization rather than always responding to the risks when it occurs and
starts to impact the company. Various strategies can be executed like risk avoidance,
reduction, sharing and transferring to protect the business of the organization.

Conclusions
The purposes of this study are to examine the effectiveness of the cycle count activities and
to identify any loopholes in the practice and procedure on inventory management of the

Base oil purchased (000)/Year 2008 2009 2010 2011 2012

Volume (Litre) 29,000 30,000 24,000 27,000 22,000

Value (RM) 93,000 114,000 103,000 134,000 133,000
Gain/(Loss)
Volume (Litre) (71) (27) (16) (130) (400) Table I.
Value (RM) (352) (200) (199) (640) (900) Percentage base oil
Analysis losses from 2008 to
Loss value percentage (%) 0.38 0.18 0.19 0.48 0.68 2012
JFC company. One company involved in the manufacturing and distribution of lubricants was
25,2 selected as a case study, while the analysis and examination was conducted by using COSO
Framework 2013 as guidance. This study found that many problems in inventory
management were due to inconsistency of practices that occur in the company. For example,
scheduled cycle count activity was not properly prepared and its standard operating
procedures were incomplete.
446 In addition, there was no segregation of duties for the person in receiving of raw
materials and the person who keys in the information into the system. This can lead to
possible mistakes that cannot be detected and prevented at the most earlier step. Stock also
can easily be stolen or lost unintentionally due to a lack of supervision and close monitoring
from the higher management. Too much trust and responsibility was put on the staff and
physical stock and records in the system are not frequently reconciled. The practice of
verbal requisition was common in this company, leading to undocumented process and
inaccurate final cost and financial figures calculation.
There are several implications of the study. Supply chain management department
should perform cycle count adjustment on a quarterly basis. They should not react only
when requested by an external auditor. They also need to aware and understand their
responsibility and accountability on the inventory. Quarterly cycle count should not only
involve supply chain management department but also must be held the same, like yearly
cycle count activity which involves various related departments. The report and adjustment
also must be done accordingly. Usually, during the cycle count activity, there is a cut-off
date to ensure that no transaction during the cycle count activity so that the numbers for
comparison between physical and recording system are accurate.
Subsequent to cycle count activity, supply chain management can also do internal
monthly cycle count rather than quarterly and yearly cycle count, especially for base oil, and
submit the monthly reconciliation reports to the finance department for consistent
adjustment. This is because base oil has very high average rate for skin loss. The more the
company purchases the base oil, the more losses incurred by the company. For example, if
the company purchases the base oil at about RM5,000,000 per month, skin loss that can be
accepted is RM25,000. If the company does not do reconciliation on a monthly basis, by year
end, the company will suffer losses amounting to RM300,000, and this will have a huge
impact on a lump sum figure in the financial statement at the year end.
There are a few limitations of the study. The management structures of the company as
well as the department keep on changing from year to year. These frequent changes also
influence the procedures and process between years which make the study difficult to obtain
consistent information. The standard operating procedures provided for this study were
developed many years ago. Not all standard operating procedures were revised or updated
and available for examination. In addition, some of the reports needed for investigation are
confidential and requests to observe and scrutinize information from those documents are
denied by the company. Thus, more in-depth analysis and verification on the issues of
interest were unable to be conducted. Finally, this study focuses on only one company.
Therefore, the findings may not be generalized to other companies because of its different
nature of business operation, working climate and practices.
Future studies should examine more companies so that a comparison of the best practices in
the inventory management can be reviewed. In addition, formal and in-depth interviews can be
conducted with staff directly involved in the inventory management so that many issues can be
discovered and extensively analysed. Other method of data collection such as survey
questionnaires can be used to gather more information from wider participants. Other types of
data analysis such as inferential statistics can be used to make more generalized conclusions
with good reliability and validity. The cause-effect phenomenon can also be investigated to Inventory
determine the impact of poor inventory management with other activities of the company and control
how it impacts financial figures in the financial statement.
weaknesses
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About the authors

Norazira Abd Karim received her Master of Accountancy from Universiti Teknologi MARA, Shah
Alam, Malaysia. Currently, she is an Accountant of a public listed company in Malaysia.
Anuar Nawawi is a Lecturer at the Faculty of Accountancy, Universiti Teknologi MARA, Malaysia.
He received his PhD in Commerce (Accounting) from the University of Adelaide, South Australia. He also
holds a professional qualification of the Chartered Institute of Management Accountants (Passed Finalist),
an affiliate Registered Financial Planner and a Master of Accounting (with distinction) from Curtin
University of Technology, Western Australia. He has taught a variety of courses centred on the
accountancy discipline. Among them are financial accounting, auditing, management accounting,
taxation, financial management, strategic management, computerized accounting and research
methodology. His research interests are diverse, including areas such as management accounting,
strategic management, forensic accounting, corporate governance and ethics.
Ahmad Saiful Azlin Puteh Salin is a Senior Lecturer at the Faculty of Accountancy, Universiti
Teknologi MARA (UiTM) Perak. He received his PhD in Corporate Governance and Ethics from
Edith Cowan University, Australia. He is also a Fellow Member of the Association of Chartered
Certified Accountant United Kingdom (ACCA, UK), a full member of Malaysian Institute of
Accountants (MIA) and a member of Malaysian Insurance Institute (MII) and Qualitative
Research Association of Malaysia (QRAM). He has taught a variety of courses in corporate
governance, business ethics, taxation, financial accounting and reporting, management
accounting, costing and integrated case study. His research interests focus primarily in the field
of governance, Islamic and business ethics, financial reporting, management, accounting
education, small and medium enterprises (SMEs) and public sector accounting. He published
many articles in local and international journals and was appointed as a reviewer in several
international journals and conferences. Ahmad Saiful Azlin Puteh Salin is the corresponding
author and can be contacted at: ahmad577@perak.uitm.edu.my

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