It Takes a Thief: One in Three Steal -Detecting and Preventing Employee Theft

It Takes a Thief

One in Three Steal –
Detecting and Preventing Employee Theft

One of three workers steals from an employer and such sleight-of-hand costs businesses more than $50 billion a year, according to the U.S. Department of Commerce.

Don’t think it’s a problem in the tire biz? Just last month an ex-store manager for an Ohio dealer plead guilty to stealing over $100,000 from the company. His booty included computer equipment, building supplies, tires and even a go-cart. And 12 years earlier, he was caught stealing $20,000 from another northern Ohio dealer.

A Small Business Administration (SBA) report, "Curtailing Crime: Inside and Out," estimates that dishonest employees account for two-thirds of retail theft, double that of shoplifting. Loss to sticky-fingered staffers ranges from 1.3% of sales for a well-managed firm, SBA says, to 7% for one where controls are loose.

So it’s wise to consider all employees guilty until proven innocent, and recognize the signs and types of employee theft. And to be prepared with appropriate steps to deter or combat theft.

Teacher With a Habit
Who are these employee thieves with the flypaper hands? They could be any of your workers, even someone you think deserves trust. A Sunday school teacher, who was an assistant with a consulting firm, stole $70,000 in just a year to feed her cocaine habit.

Usually such employees share three traits: motive (often pressure from an overwhelming financial obligation), too little compensation (real or imagined), and opportunity. In other words, the thief needs the money, feels underpaid and seizes an opportunity.

Check Register First
Look first for cash register theft. Notorious criminal Willie Sutton explained that he robbed banks because that’s where the money was. So it is with employee theft: the cash register is where the money is.

Numbered sales invoices or cash register receipts should be used for all sales regardless of the amount. Spot checks and other monitoring procedures will tell you if some cash sales are not being recorded.

We know of one small retailer who lost $70,000 the first year after he bought his business because a shop supervisor organized a theft ring. She insisted every counter employee participate, and told each how much to take daily, ranging from $10 to $20 each.

Sometimes cash register theft can be thwarted simply with a sign offering a free purchase to any customer who is not given a receipt. Or turn to a professional shopping service to make purchases to see if the receipts are rung in the register.

Ghosts, Kickbacks & Fraud
Cash theft from the register or before the money is rung up usually is easy to detect – more on that later. There are many other theft methods: lapping, accounts payable juggling, payroll ghosts, kickbacks and inventory fraud.

Lapping involves diverting money, usually checks, from a customer’s account into an employee’s account. Then to cover the first theft, money may be transferred from a second customer’s account – hence the word lapping.

In accounts payable juggling, an employee falsifies payments to real vendors or creates phony vendor addresses for receiving company checks. Or the employee overpays an invoice and receives the difference from the vendor. Studies show that vendor fraud and administrative error account for 20% of theft.

Payroll ghosting is as simple as keeping a recently discharged or resigned employee on the books for an extra payroll period, and then pocketing the extra pay. While the amount must be entered on the former employee’s W-2 form, few employees check their W-2s closely.

While they are the most common form of theft, kickbacks are perhaps the most difficult to detect. Employees can take bribes from vendors – often in cash to leave no paper trail – or the kickback or bribe may be something as simple as a gift of merchandise, often considered a way to grease the business wheels. Such a gift is a theft if unreported to the employer who might rather want that extra supplier consideration to be used to reduce prices.

Inventory fraud is common among employee thieves, and may involve buying more than is needed and diverting the excess to the employee for personal use or sale. This is part of the huge "back door" theft scenario, which involves sneaking out merchandise from the store or warehouse. A variation of merchandise theft is "front door," giving a customer extra merchandise without ringing it up and splitting the proceeds later.

The Best Defense
Best theft deterrent is to avoid hiring a potential thief in the first place. Pinkerton urges telling all job candidates that they are subject to random drug testing because drug users often steal to support their habit. Even if you don’t test, the mere threat will weed out some undesirables.

One job-candidate testing firm fires 125 rapid-fire questions at the applicant, including whether the applicant was ever involved in a theft. Almost one of five admits to stealing from a previous employer. Reason for the admissions? They believe just about everyone steals and denial would appear to be lying.

Another theft deterrent is distribution of a written employee behavior plan that they are required to sign. Telling employees that hidden cameras monitor your premises also may stop a would-be thief. One theft victim had police come to his store to arrest an employee thief – the biggest deterrent of all.

Some Sleuthing Tips
Here are some specific theft-clues to look for:

Increase in overall sales returns. Defective merchandise or tinkering with accounts receivable payments.
Decline in cash or credit sales. May indicate business is souring or a thief is present.
Inventory shortage may be an error or pilferage.
Frequent customer complaints of inaccurate statements – sloppy or fraudulent bookkeeping.
Employees with living standards much higher than earnings justify. Won the lottery or are they picking your pockets?
Merchandise hidden in areas open only to staff.
Consistently lower receipts on certain shifts.

One basic theft-prevention technique requires separation of employee duties involving transactions and financial procedures. Whoever receives the mail and checks its contents should not also be responsible for posting entries in the accounts receivable records.

Monitor the Mail
Some retailers have company mail delivered to a post office box or even to their home rather than the place of business. Don’t assure yourself that an employee thief can’t convert checks made out to your company into cash. You would be amazed at how easily this can be done.

Either personally prepare the daily cash deposit or compare such deposits made by employees with the record of cash and checks received. Keep a cash receipts log that records all checks as they are received. All paid invoices should be marked "paid" and filed securely to prevent double payment.

Consider bonding employees who have access to your financial assets. The bonding company reimburses you for a theft, and the process itself is a deterrent to employee theft in the belief that a bonding company would be tougher than you to deal with.

Don’t Try to Be a Cop
Never confront and charge a theft suspect. That’s a job for police or the bonding company if you have one. Or there are security consultants to be hired – expensive but professional. Do get some form of professional help as soon as you are aware of any theft beyond the petty.

Do not leap to any conclusions when it comes to suspected thefts. What may seem to be embezzlement may have a valid explanation, and your false accusation could lead to serious civil liability.

Announce Surveillance Methods
Announcement of hidden cameras or other surveillance technology usually deters a thief, much like a motorist who slows down when he sees a police car. The cameras may be in plain sight and trained on the cash register, and they may even be fake – deterrents nonetheless. The main thing is that your employees realize you are serious about prevention, detection and prosecution of theft.

Never stop letting your people know that you are always aware and vigilant. That way you influence the moment of decision when an employee chooses whether or not to steal.

John Rogers is an editor, a regular writer for business magazines, and has authored two frequently reprinted books: Store Planning and Store Operations. His monthly column – Business Sense – appears in Tire Review.