The real problem, he pointed out, is the retail inventory method. In this method, retailers value their inventory based on the items' presumed selling price. Making it even tougher is including all the markups and markdowns that occur. Yake suggested that retailers need to move to the cost accounting method, which values the inventory at cost. Shrinkage is generally thought of as inventory that's lost or stolen.
Shrinkage can be a convenient black hole for hiding buying errors, mismanagement and fraud.
For example, Yake said his firm identified 108 causes for shrinkage in the retail industry in a report to the U.S. Tax Court, and only three were theft-related. In an interview after the presentation, 'Yake noted that his first experience with abusive business practices occurred at Zayre Department Store, where he worked for 10 years starting in the mid-Sixties. Zayre was acquired by Ames Department Stores in 1988 and eventually closed. Zayre regularly destroyed merchandise to cover up buying and other operating mistakes, he disclosed. The company's deceptive practices included inflated markups at the store level and unrecorded markdowns in the buying division, according to Yake.