$961K in liquor went missing from Michigan commission's inventory, audit finds

Lansing — Michigan’s Liquor Control Commission lacked the proper controls to accurately track its spirit inventory or its licensing program, resulting in hundreds of thousands of dollars in missing liquor, significant excesses and negative balances in its inventory and the issuances of a handful of liquor licenses in dry communities.

One of the largest findings of the audit released Tuesday indicated the commission was missing 20%, or roughly $961,000, of the $4.9 million recorded in inventory between January and February 2022 — a count not confirmed through a state-led physical inventory of Michigan warehouses, but through distributors at the behest of the state.

The missing liquor inventory was one of three material conditions and two reportable conditions found at the liquor commission, whose overall performance was rated as “not sufficient” in an audit released Tuesday. The audit by Auditor General Doug Ringler’s office reviewed records between 2019 and 2022.

In Michigan, the Liquor Control Commission is the wholesaler for distilled spirits, selling bottles of liquor through three authorized distribution agencies that warehouse, package and deliver the spirits from the commission to the retailer. The state’s roughly 29,500 retailers submit orders to the state's online system or distributors; distributors then are tasked with reporting their order deliveries daily to the state. The state’s spirit inventory as of Sept. 30, 2022, stood at about $3.2 million, according to the audit.

The missing inventory between January and February 2022, which had been supplied by vendors, meant the commission was forced to refund the vendors for the roughly 62,000 bottles of spirits, worth about $961,000, that the state had purchased but couldn't find to deliver to retailers.

“MLCC was unable to provide documentation regarding the whereabouts of the missing inventory, whether it was returned to the vendor or distributed to a retailer for which MLCC did not receive an invoice prompting MLCC to record the sale,” the audit found.

The missing liquor was marked as a material condition — one of the most serious audit findings — because it appeared the physical inventory counts that could have helped to avoid those discrepancies weren’t performed for more than two years between October 2019 and July 2022, the audit said.

The Department of Licensing and Regulatory Affairs generally agreed with the audit's findings and said it was modernizing its information technology systems, improving its processes for recording orders and seeking to fill a vacant auditor position.

"This position will further MLCC's goal of continuous improvement over applicable controls and monitoring activities," the audit said.

State Rep. Tom Kunse, R-Clare, criticized the agency's inability to account for the roughly 62,000 liquor bottles found to be missing between January and February 2022.

“There are clearly deep issues within the commission that must be addressed," Kunse said. "Just because we are talking about alcohol doesn’t make these problems any less concerning."

A Liquor Control Commission spokesperson said Tuesday the commission didn't have further comment.

Other issues highlighted

The audit's second material condition found the commission overall didn’t do enough to reconcile sales with purchases to fully understand whether it was stocking correctly. Doing so, state auditors argued, would have helped to verify the accuracy of inventory numbers, identify inaccuracies in distributor reports and check on the accuracy of retailer payments and invoices.

“MLCC has experienced difficulties accurately tracking inventory resulting in excessive or negative inventory balances and physical inventory count discrepancies,” the audit said.

From February 2021 through August 2022, retailers submitted about $1.1 billion in liquor orders directly to distributors, with no record going to the commission’s online order tracking system, the audit said. The daily reports the commission got from distributors had gross sales, but not a breakdown by retailer.

The audit also indicated the commission had a two-week to three-week delay in generating an inventory report, inhibiting the commission's ability to correct inaccuracies in the warehouses in a timely way.

“… The state does not have a method to independently validate the accuracy of the information provided by ADAs (authorized distribution agents) and the significant reliance placed on ADAs to control the spirit product sale and distribution process, which recorded approximately $1.6 billion in revenue for fiscal year 2022," the audit found.

More:Michigan slaps liquor distributor with 'historic' $3 million fine

A third material condition identified by the auditor general found the commission's lack of inventory monitoring and management resulted in “excessive and negative spirit inventory balances.” From October 2020 through July 2022, the audit found the commission had both too much of certain spirits and not enough of others in inventory.

In some cases, the commission didn’t purchase thousands of bottles of spirits before recording a sale to retailers, resulting in negative inventory ranging from $114,726 in bottles to $6.6 million in bottles. As of July 2022, the commission had negative balances related to 520 different spirit products, with 31% due to distributor changes that weren’t reconciled with commission records.

In other cases, the commission’s lack of monitoring led to “excessive, accumulated inventory,” including 780 bottles of one liquor over 77 weeks with no sales occurring in the week the spirit was purchased. In one instance, the commission purchased 12,204 bottles of a booze in one week but only sold 1,104 bottles and then maintained an inventory of 11,000 bottles of the spirit for 48 weeks, including the last 19 weeks when no sales of that liquor were recorded.

“Although MLCC asserts it performs a weekly review of total spirit sales for reasonableness, this review does not include a comparison with purchases and does not look for reasonableness on a product-by-product basis,” the audit found.

Certain cities exceed license quotas

Another lesser finding indicated the commission delayed the return of spirits to vendors that it couldn’t sell, “delaying the state’s refund and overstating inventory.”

A final lesser finding said the commission had inadequate controls over the issuance of liquor licenses, resulting in incorrectly entered licensing information in state databases and in the issuance of four liquor licenses in communities that had rules against selling spirits.

The audit also observed that the Liquor Control Commission's quota system, which allows a certain number of licenses within communities, might need to be reevaluated.

Several communities exceeded their quotas — sometimes as much as double the number allowed — because of license transfers between businesses, exceptions made for resort or redevelopment districts, or because decreased population called for a lower quota, but the commission wasn't able to revoke licenses at random to comply with it.

Among the communities exceeding their quotas were Detroit, which is limited to 426 on-premise licenses but has 517; Flint, restricted to 54 but has 89; Hamtramck, limited to 19 but has 42; and Wyandotte, restricted to 17 but has 38.

"The impacts of liquor license quotas should be further evaluated to determine if current processes for and controls over license management should be reassessed or if amendments to the current law are appropriate," the audit said.

eleblanc@detroitnews.com