How Inventory Overstatement and Hidden Vendor Debt Actually Happen — and the Controls That Catch Them
Two numbers can sink a company that looks, from the outside, like it is winning. The first is an inventory balance that is bigger on the borrowing base than it is in the warehouse. The second is a stack of vendor invoices that never made it onto the balance sheet. Put them together and you get a business that is borrowing against assets it does not have to pay for debts it has not booked — and nobody in the building set out to commit fraud to get there.
The recent Uncle Nearest receivership made both problems public. Court filings allege the distiller overstated its barrel inventory by roughly $21 million — representing about 77,000 barrels to secure a $24 million increase in its credit line — while millions in vendor obligations sat unpaid, some past due for years. Those are allegations, not findings, and the case will be sorted out in court. But the mechanics they describe are not exotic. I have seen smaller versions of both inside otherwise healthy companies, and the uncomfortable truth is that neither starts as deceit. Both start as a finance function that could not keep up with the business it was supposed to measure.
“By the time a misstatement is large enough to make the news, the control that would have caught it had been missing for years, not weeks.”
LJ Govoni
This is a piece about how the two misstatements actually happen — the ordinary operational drift underneath the headline — and the specific, boring controls that surface them early, while they are still measured in thousands and not millions.
Inventory overstatement is usually drift, not deceit
An overstated inventory number almost never begins with someone typing a fake figure into a report. It begins with a perpetual inventory system that slowly separates from physical reality, and a close process that stops checking the two against each other.
The drift has a handful of reliable sources. Standard costs get set once and never refreshed, so the per-unit value on the books reflects last year's input prices, not this quarter's. Production is recorded but scrap, spoilage, and yield loss are not, so the system believes every pound that entered the line came out as sellable product. Work-in-process — aging whiskey, fermenting product, anything that sits for months — gets carried at a value that assumes it will all become finished goods at full yield. And returns, damages, and obsolete SKUs stay on the books because no one is empowered to write them down.
None of those is fraud. Each is a gap. But they compound in one direction — up — because the errors that inflate inventory are quiet and the errors that deflate it get noticed immediately when a customer order can't be filled. Left alone, a perpetual balance drifts higher than the shelf, and if that balance is also feeding a borrowing base, the company is now borrowing against the gap. This is the same systems-drift problem that shows up when a business outgrows the tools it keeps its books in — the records stop matching the plant, and everyone downstream trusts numbers that no longer reflect what is actually there.
Where hidden vendor debt hides
Unrecorded liabilities are the mirror image. Inventory overstatement makes assets look bigger than they are; hidden vendor debt makes liabilities look smaller. The effect on the picture a lender or buyer sees is identical — the balance sheet is healthier than the company.
Vendor debt goes missing in predictable places. Invoices that arrive after the close but relate to goods already received get pushed to next period instead of accrued. Purchase orders are cut and fulfilled but never three-way matched, so a received shipment carries no recorded payable. Checks get printed and then held in a drawer — cash looks preserved, the payable looks satisfied, and neither is true. And the most dangerous category: side arrangements and payment-plan promises made verbally to a supplier who is tired of waiting, which live in someone's inbox rather than in the ledger.
The through-line is that accounts payable is treated as a data-entry function instead of a control function. When AP only records what someone hands it, everything nobody hands it becomes invisible debt. Managing that relationship deliberately — especially when cash is tight and the temptation to stall vendors is highest — is the difference between a payables balance you can defend and one that surprises you.
The controls that catch both
The good news is that the controls that catch these misstatements are unglamorous, cheap, and old. None of them requires new software or a bigger team. They require someone to own them and a cadence that does not slip. Here is the short list I would put in place first.
| Control | What it catches | Cadence |
|---|---|---|
| Cycle counts on high-value SKUs | Perpetual-to-physical inventory drift, before it compounds | Weekly |
| Borrowing-base to GL reconciliation | Inventory or AR pledged to a lender that the books don't support | Monthly |
| Received-not-invoiced (RNI) review | Goods received with no recorded payable — hidden vendor debt | Monthly |
| Three-way match on POs | Payments and payables that don't tie to a PO and a receipt | Per invoice |
| AP aging + vendor statement recon | Past-due balances and promises that never hit the ledger | Monthly |
| Standard cost refresh | Inventory valued at stale input prices | Quarterly |
| Obsolescence / NRV write-down review | Dead and damaged stock carried at full cost | Quarterly |
Two of these deserve emphasis because they are the ones most often skipped and the ones that would have caught the headline cases earliest.
The first is the borrowing-base reconciliation. If you pledge inventory or receivables to a lender, the certificate you sign each month is a representation about specific numbers. Someone independent of the person who prepares it should tie every line back to the general ledger and to a supporting count or aging — every month, before it goes out. The certificate is not a formality; it is the exact document that turns an accounting error into a covenant breach.
The second is the received-not-invoiced review. Every month, pull the list of shipments received but not yet matched to an invoice, and accrue anything real. That single report is where hidden vendor debt is either caught or created. A company that reviews RNI monthly cannot accumulate years of unbooked payables. A company that doesn't will find them all at once, usually when a supplier stops shipping.
Why lenders and buyers find it before you do
The reason these problems tend to surface as a crisis rather than a correction is that the people most motivated to find them are outside the company. A lender running a field exam and a buyer running quality-of-earnings diligence both do exactly what the internal controls above are meant to do — they tie the pledged assets to physical reality and the payables to the vendors. They just do it later, with more leverage, and at a worse moment for you.
Understanding what a lender actually scrutinizes before extending credit is the same knowledge that tells you which controls to run internally. If you can pass your own field exam every month, you are not managing to impress a lender — you are managing a business whose numbers are true. That is the entire point. Controls are not a compliance tax. They are the mechanism by which the balance sheet stays connected to the warehouse and the payables stay connected to the vendors, so that the version of the company on paper is the same one that exists in the world.
Fraud makes headlines. Missing controls make fraud possible — and far more often, they simply let honest drift grow until it is indistinguishable from fraud. The fix is not heroic. It is a cycle count, a reconciliation, and a monthly report that someone actually owns.
About the author: LJ Govoni is a finance and operations executive with nearly two decades as CFO, COO, and President across PE-backed and founder-led food manufacturing, craft beverage, and CPG businesses. He was named to the Tampa Bay Business Journal's 40 Under 40 in 2023 and lectures in business finance at UTSA's Carlos Alvarez College of Business. He writes here in a personal capacity; views are his own. More at ljgovoni.com.