Receiving Product into Inventory/Annual Inventoy 2708

  • I manage a distribution center and have been with my current employer less than 1 year. We are coming up on our annual inventory and in the discussions I have several questions which I am not sure were best practices from my previous employer or if it was a SOX requirement. The concerns are as follows:
    -When receiving product into the building, if we are not able to put the product away that day, we simply let it sit on the dock. No where in our inventory management system does it show we have this product. The product is physically here in our building, but it does not show received in our system.
    -For our annual inventory we continue to receive return product back from customers and we ‘quarantine’ the product. Essentially, product is physically in our building, it does not show in our building in our systems, customers are not being issued a credit and we do not count this product during inventory.
    Any help given in clarifing whether there is a SOX violation or simply an opportunity for better practices would be greatly appreciated.

  • Section 404 of the Sarbanes-Oxley Act is primarily concerned with assuring the quality (i.e. accuracy and reliability) of consolidated financial statements. So one question would be whether the monetary inventory balance at your distribution center is material in relation to the consolidated financial statements or your group of companies and whether those special inventory items at your dock or in the quarantine inventory are material in relation to the consolidated financial statements.
    Even if the SOA does not apply to your company (i.e. it is not a public company), timely information about those special inventory locations may still be relevant for operational decisions and for reviews whether there are any problems. The number and value of items in a quarantine location for potentially faulty products can be extremely relevant for quality assurance. As a manager, I would be interested in the number of items with a pending quality claim and how long they are sitting in this inventory before they are repaired/reworked, scrapped or sent back to the customer as OK. Toom much stuff spending too much time in quarantine can show quality problems and bottlenecks in in the quality inspection team. Unless I can get this information from another source, I would want the quality inventory in a special inventory location in the system. Whether the quantities in this locations are considered the legal property of the company and included in its balance sheet is a legal question but most inventory systems can handle the management of inventory that you own or do not own (e.g. consignment inventory).
    If inventory is sitting outside in the loading bay, you may consider whether there is a risk of theft, damage through wheather or misidentification (good quality to be shipped or bad quality that just came back, for which customer, etc.). Maybe the time during which goods are received at the loading bay and the working time of the worker that would put it in the warehouse should be synchronized so that stuff does not sit outside.

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