Stop Annual Revenue Loss Of $7-10 Million

Following is a summary of an Internal Audit Consultant’s compliance audit of a nationwide specialty jewelry retail chain store operation, which almost immediately identified a major recurring revenue loss and brought about improved internal controls and enhanced operational policies and procedures.

Any retail business is complex and evolving due to ever-changing demographics, economy, fashions and consumer taste. A high-end jewelry business selling expensive diamond jewelry can be a very complex business due to so many variables in shapes, sizes and quality of diamonds. The company was in this business for over a hundred years with over $500 million in annual revenues. It took a major financial scandal and a new management to realize that an Internal Audit expert was needed to take a fresh look at the operational controls.

The Audit Consultant was hired in January 2007 to develop an Internal Audit function and review the store operations to verify compliance with company policies and procedures, and to ensure sound internal controls existed. The Consultant studied the Company’s operational policies and procedures, and also held face-to-face meetings with senior management and the department heads not only to learn the store operations but to also get acquainted with the corporate culture and philosophy. The Consultant started visiting the stores in various parts of the country to audit the operations personally during the first week of March 2007. It took only a few store visits to uncover major operational non-compliance issues resulting in massive revenue losses.

Expert’s Findings

The transactional analysis and personal interviews of store employees disclosed that merchandise was being sold at discounts much higher than specified per company policy, up to 80% off in some instances, to register a sale. The other major non-compliance issue noted was the miscoding of jewelry repair orders, and possible pocketing of cash receipts and deleting repair transactions from the system. As a result of miscoding, the third party repair vendor did not reimburse the company for the completed repairs adding to the loss. The Consultant and the Company CFO sat down and analyzed the financial consequences of non-compliance, and extrapolated the losses based on annual sales and number of transactions. The result was, of course, eye-opening and a feeling of disbelief among the operations executives. The initial analysis revealed that the Company was losing revenues at an average of $7-10 million annually.

As a result of the above findings, a task force was formed immediately and the store audits were halted temporarily. The Audit Consultant was requested to consult on improving operational policies and procedures, creating self-audit checklists for store employees to hold them accountable, and the sales commission program was revised to focus on actual profit margin. The improved internal controls showed immediate favorable results in subsequent months.

The total cost of the Audit Consultant’s services was around $40,000 for this assignment. The recurring financial reward to the company, based on the company’s CFO’s initial estimate was between $7-10 million annually.

To see the resume of the expert associated with this case study, see the link below.