When Inventory Matters: Why Investors and Lenders Sometimes Need Independent Verification

By Gary A. Stone, ASA, Manager at Swartz and Associates

For many businesses, inventory is one of the largest assets on the balance sheet. Companies rely on inventory records for financial reporting, operational planning, and financing arrangements. Most of the time, those records are accepted without question.

However, there are situations where investors, lenders, or prospective buyers require additional assurance that reported inventory quantities and values are accurate. In those cases, an independent inventory audit or verification can provide valuable insight.

Why Inventory Verification Is Important

Inventory often serves as a critical component in business transactions and financing arrangements. Decisions involving significant amounts of capital may depend on the accuracy of inventory records.

Examples include:

• Business acquisitions.
• Due diligence reviews.
• Asset-based lending arrangements.
• Credit facility renewals.
• Shareholder or investor reporting requirements.

When inventory represents a significant portion of a company’s assets, independent verification can help reduce uncertainty and identify potential discrepancies before a transaction is completed.

Common Areas of Review

The scope of an inventory audit depends on the objectives of the client, but typically includes:

• Observation of physical inventory.
• Verification of quantities through sample testing.
• Review of inventory records and reports.
• Reconciliation of physical counts to accounting records.
• Evaluation of inventory valuation methodologies.
• Identification of obsolete, slow-moving, or damaged inventory.

The objective is to determine whether inventory records reasonably reflect the assets that actually exist.

Real-World Applications

In one engagement, an investment group requested independent verification of inventory as part of its due diligence process before completing an acquisition. Because inventory represented a meaningful portion of the company’s value, the buyer wanted additional confidence in the reported balances before proceeding with the transaction.

In another case, a financial institution requested verification of inventory that was being used as collateral. The review provided an independent assessment of the inventory supporting the lending relationship.

Although the circumstances were different, both projects shared a common goal: providing decision-makers with reliable information regarding a significant business asset.

The Value of Independent Verification

Typically, variances are due to process issues, timing differences, recordkeeping errors, or inventory management challenges.

An independent review can help identify these issues and provide stakeholders with greater confidence in the information used to support important business decisions.

Whether supporting a lender, investor, or prospective buyer, inventory verification can be a useful tool when significant financial decisions depend on the accuracy of inventory records.

Swartz + Associates, Inc. (SAI) is a full service property tax firm specializing in the review, analysis and appeals of real and business personal property tax valuations. If you need help with your property taxes, give us a call!