Employee Theft

Whether your business is manufacturing, retail, wholesale, service, hospitality or high tech, it is probably experiencing some degree of employee theft. The list of items employee steal from their employers is endless and includes such items as inventory, money, parts, components, supplies, information and customers. In fact, it is estimated that 95% of all businesses experience employee theft and management is seldom aware of the actual extent of losses or even the existence of theft.

Studies by the Department of Commerce, American Management Association and other credible organizations estimate that employees steal over a billion dollars a week from their unknowing employers. Furthermore, they estimate that nearly 1/3 of all bankruptcies are caused by employee theft and it takes approximately $20 in sales to offset every $1 lost to theft. Often management has indications of the problem through declining profits, unexplained inventory shortages, rumours and many other signs. However, it seldom considers the fact that employee theft could be a major factor for the losses.

Creating A Climate of Honesty: Most experts believe that the first step in addressing the problem is creating a climate of honesty within the organization. Retailers should make it clear to employees and applicants that dishonest behavior will not be tolerated and implement programs to ensure they are hiring people who would not be considered high risk for stealing from the company or acting violently towards customers, coworkers or managers. Retail employees who are honest tend to follow the rules and rarely steal from their employers. They also stay in a job longer and have a much higher rate of job satisfaction, which translates directly to lower turnover and better customer service

The Impact of Employee Theft

At the National Retail Federation's Loss Prevention Conference & Expo last June (www.nrf.com), retail-loss guru Dr. Richard Hollinger revealed the results of his latest annual National Retail Security Survey. According to his calculations, US retailers lost more than $41 billion last year due to the four major sources of shrink: vendor fraud, administrative errors, shoplifting and employee theft - the last two accounting for almost 80 percent of losses (see pie chart on page 196).

Of course, retailers know there are shoplifters out there, and dishonest employees are more common than we'd like to think, but what exactly can retailers do to protect themselves? Plenty, say experts.

In the recent National Retail Security Survey Report from the University of Florida, loss prevention executives again indicated that they believe employee theft to be the single most significant source of inventory shrinkage.

  • Four major sources of shrink: vender fraud, administration errors, shoplifting, employee theft
  • Retailers attributed 47% of their total inventory shrinkage to employee theft;
  • Total employee theft cost retailers $15 billion annually;
  • 16 out of 29 types of retail chains reported employee theft rates well above 44% average;
  • No other form of larceny costs US/Canadian citizens more than employee
  • Losses from employee theft continue to be higher than losses from shoplifting

Signs of Theft

Since there are as many signs of theft as there are ways to steal the list of warning signs is endless. The key is for management to realize that certain conditions or incidents may not be the result of carelessness or incompetence, but indications that theft is in progress. All irregularities or deviations must be evaluated with an open mind and creative mind. Inventory or product found near employee exits or dumpsters, sensitive documents discovered in copy machines, employees in key positions who refuse to take time off, "xeroxed documents used in lieu of originals have been signs of past theft and may be indications of existing dishonesty. 

Why Employees Steal

Amazingly, employees questioned as to why they stole often justify or rationalize their actions. Often, they state the opportunity of theft presented itself through lax policies, controls and management indifference. Moreover, many employees cite opportunities created by management, not their financial need, as their primary motivation to steal. Another significant reason employees give for stealing is their perceived belief management was stealing so it was OK for them to also do so. This condition proves the point that, if management wants a theft free work environment, it must set the example of honesty and adherence to policies.

Some other common examples of employee rationale for theft include:

  • I am underpaid and I'm taking what I deserve.
  • Everybody does it, besides, they can write it off.
  • The company makes a large profit and I deserve some of it.
  • The company angered me and this is how I get revenge.

How to Interview an Employee Suspect

There are many crucial issues to consider in dealing with an employee suspected of theft. On one hand, the employer wants to know the truth regarding possible guilt of an employee suspected of theft even though the employee is reluctant to cooperate. On the other hand, there are serious legal and employee relation problems that can arise from not handling the situation in an appropriate manner. Although the issues are many and complex, the following are just a few of the basic steps to be followed in determining the facts of a theft incident leading to the interview of suspects;

  • Carefully evaluate the source and validity of any information that alerts management to a potential theft problem.
  • Gather as much information or evidence regarding the alleged theft as possible prior to taking any action.
  • If necessary, review facts and findings with an attorney, auditor in areas of legal and accounting concerns.
  • Stick to and discuss issues at hand. Don't deviate or allow deviation from obtaining the truth and facts surrounding the situation.

Dealing with employees suspected of theft tests the emotions, restraint, legal knowledge and objectivity of every manger and supervisor. Since the consequences of mishandling the investigation of employee theft is so great, the key is to learn the procedure now and not learn during the course of an incident.

How to Prevent Losses

Until management gains an accurate understanding about employee theft and initiates sound loss prevention measures, it will remain a major drain of profits productivity and employee morale. Minimally, the following steps should be taken:

  • Conduct a survey or audit of your business. Identify possible existing theft and potential opportunities or risks to potential theft. Immediately develop a plan to eliminate or reduce your exposure to these risks.
  • Educate supervision and the general employee population as to the impact employee theft has on them and how they, not just management, are the key to solving the problem.
  • Develop a Loss Prevention Program that ensures an ongoing effort to prevent and detect dishonest activity.

Dealing with Employment Theft

The cost of employee theft and embezzlement might be as high as $638 billion per year, according to the Association of Certified Fraud Examiners (www.ACFE.org). The organization also estimates that small businesses experience fraud losses, including "asset misappropriation," at a rate of nearly 100 times that of larger companies.

The best internal theft prevention, experts agree, is a watchful eye:

  • Stop by your store without warning. Make periodic (yet randomly timed) unannounced visits to each and every retail location.
  • Spot-check inventory/drawer. During unannounced visits, announce: "I'm just double-checking inventory numbers and doing a register check." Pick a few products and check physical inventory against inventory sheets/POS inventory figures. If possible, run a cash drawer reconciliation. Announce: "I'll be back again soon to run through this again." This lets employees know management is keeping its eye on the ball.
  • Have an inventory-tracking system. Use a POS system that tracks inventory automatically or, at a minimum, use paper-based inventory-tracking sheets to send a signal to employees that inventory is indeed being monitored.
  • Imbed text overlay over CCTV cameras to monitor what is served and rung in at real time with POS Analytics.
  • Check the z-tape. Check those z-tape numbers. If yesterday's z-tape was number 24 and today's is 27, what happened to 25 and 26?
  • Train employees. Provide all employees with training on theft-prevention, both internal and external. Discuss the ways the company is prepared to detect both.
  • Encourage anonymous tips. Publish a phone number employees can call to leave an anonymous message if they suspect a co-worker of stealing product or cash. If employees are aware their co-workers are watching and could report them, they will be less inclined to get sticky fingers. According to the ACFE, almost 39 percent of small-business fraud detection is the result of a tip. Just above 20 percent is detected by accident, and about 24 percent is due to an internal audit. Less than one percent is detected due to notification by police.
  • Use a Secret Shopper. A secret shopper (even a friend or family member) can report if a payment went into the cash drawer, or into a side drawer or the employee's pocket. The secret shopper can also report if a receipt was generated by the register/POS system, or by an "unofficial" receipt book. As an added bonus, a secret shopper can also give you feedback on an employee's general alertness to his or her surroundings, and report if the employee is following company instructions on how to spot shoplifters.

Some specialty retailers estimate that 85 to 90 percent of theft is internal. To spot the signs of employee theft:

  • Watch for calculators and receipt books. Many retailers say that a sure sign of a problem is an employee who has a calculator next to the cash drawer, or a separate receipt book tucked into a drawer or pocket.
  • Pay attention to living-standard increases. Is there an employee with an unexplained rise in his or her living standard? If an employee suddenly goes from being cash-strapped to being flush, there may be a problem (but then again, maybe Grandma recently left them some money, so don't accuse, but do some checking).
  • Check deposits. Don't just check if the deposit numbers match the sales figures. Also check that deposits are being made routinely and when expected (particularly easy to do, now that almost every bank has online banking). If deposits are typically made every day and then suddenly they are being made every few days, find out why.
  • Check cash-to-credit purchase ratios. If the typical purchase ratio is 80 percent cash to 20 percent credit, and then suddenly the ratio is 50-50, it's time to ask a few questions.
  • Watch the "no-sales." Many retail owners know that the leading indicator of theft is a single piece of data on your x-tape: the "no sale" number. If a typical day's no-sale tally is four, but every time a particular employee works the tally is 10, there may be a problem.

Of course, there's no way to completely protect yourself against external and internal theft, but you can make your employees-and customers-aware that you're keeping a close eye on your business, which experts say is the first and most-critical step in shrinking your shrink.

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