Inside job: Is your greatest loss threat right under your nose?

by charlene_voisin | December 1, 2013 9:00 am

By David J. Sexton

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Reality TV—it’s everywhere these days. Although this particular type of programming generally isn’t my cup of tea (with so much of it being contrived and representing anything but reality), I am nonetheless intrigued by a certain category of it that showcases an all-too-real threat to retail businesses.

I’m talking about those hidden camera shows in which the owner or manager of a business (often a restaurant or bar) can’t explain a marked deterioration of the bottom line and hires a video-surveillance expert to investigate. Sometimes the footage reveals simple cases of employee slacking or incompetence. Often, however, it exposes employees who’ve been pocketing product or cash, entering into fraudulent relationships with vendors, skimming and then falsifying receipts to cover up, using company assets for personal purposes, or otherwise profiting from crime against their employer.

The stark reality

Regardless of each particular show’s authenticity (let’s face it, some of them do appear staged), the problem of employee, or ‘internal,’ theft they address is very real, very serious, and growing, as some recent statistical findings in Canada attest.

The reactions from the retail business owners on these shows have common emotional threads like surprise, disbelief, and disappointment. “How could someone whom I hired, trained, and trusted—someone with whom I worked closely every day—do this to me and to our business?”

The statistics, however, contradict employers’ faith in their employees. In December 2011, the Certified General Accountants Association of Canada (CGA-Canada) released its report, ‘Does Canada Have a Problem with Occupational Fraud?’ The report included results from the association’s own survey of small- and medium-size enterprises (SMEs) and found the following:

“One quarter (26 per cent) of surveyed SMEs reported to have experienced at least one incident of occupational fraud in the past fiscal year; and about another four per cent of respondents were not sure whether or not occupational fraud had occurred in their companies. These proportions translate into an estimated 290,000 Canadian SMEs that were victims to occupational fraud in 2010 and another 50,000 that do not rule out this possibility.”

While many retailers and, in particular, jewellers, are focusing their loss-prevention efforts on outside threats, they may be paying too little attention to the threat from within. The Retail Council of Canada (RCC) underscores this point in its more recent report, ‘Securing the Bottom Line: Canadian Retail Security Survey 2012.’ The results show that while the proportion of external theft-related incidents victimizing retailers since the RCC’s previous survey of 2008 has shrunk, “internal theft has increased to 33.4 per cent of all reported incidents from only 19 per cent in 2008.” The report expounds: “With insight into retailers’ operations and systems, dishonest employees have the ability to do more harm than typical shoplifters.”

Theft under the microscope

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According to Jewelers Mutual Insurance Co., cases of betrayal by employees represent a broad spectrum of thievery, from simple pocketing of cash or merchandise to highly sophisticated embezzlement schemes. Tactics include:

• under-ringing tickets and keeping the difference;
• transferring false merchandise returns or layaway plans onto gift cards;
• hacking computers to divert funds;
• capturing funds from payment of fake invoices;
• accepting payoffs from vendors; and
• turning a blind eye while an accomplice makes off with merchandise.

Motivations vary, too. The allure of a fast take is perhaps the most obvious enticement. However, loss-prevention experts caution store owners and managers not to overlook the numerous other factors that can influence employee theft. These include reprisals from disgruntled workers, thrill-seeking, the need for attention, drug abuse, and mental illness.

With numerous possible motivations and so many opportunities for workers who operate unchecked, Jewelers Mutual recommends the following steps to discourage would-be employee thieves:

1. Screen job applicants carefully within the boundaries of anti-discrimination laws. Require each applicant to complete your business’s job application, rather than rely on resumés that offer only what applicants want you to know. And be sure to check all references before you extend an offer. Remember, you can’t count on appearances.
2. Closely observe employees who engage in financial transactions or have access to computer systems or financial records, especially recent hires and those who handle merchandise.
3. Check and affirm your daily receipts. Price merchandise by stamp or machine, rather than by hand. Allow only authorized employees to price merchandise.
4. Keep a record of keys issued and do not allow opportunities for duplicates to be made.
5. Consider using motion detectors, electric eyes, or Underwriters Laboratories of Canada- (ULC-) certified central station alarm systems to deter ‘breakouts’ (i.e. an employee hiding inside the store and leaving after hours with stolen merchandise in tow).
6. For returns and refunds, have at least one other employee corroborate the legitimacy of the transaction in question.
7. Make sure your merchandise isn’t taken out with the trash or the mail. Beware of collusion between employees and trash collectors or delivery workers.
8. Consider conducting a formal audit every six to 12 months. Very often, employee theft goes on for months or even years because of managerial inattention. It is a best practice to have an independent accountant perform an audit to ensure accuracy of all accounts.
9. Determine whether a third-party payroll service might help prevent losses.

In addition to these measures, Jewelers Mutual and other loss-prevention experts strongly advise business owners to establish an atmosphere of professionalism and integrity with thorough employee training, clearly communicated policies and procedures, and appropriately conveyed expectations. Kyle Murray, director of the School of Retailing at the University of Alberta, echoed this point in an RCC newsletter, Retail Loss Prevention: “It depends on your relationship with employees and the systems you have in place,” he said. “Take care of your employees. If you do that, you’re less likely to have theft.”

Avoidance tactics

The RCC’s report reaffirms the importance of store owners adopting specific precautions. “Retailers will need to address the economic and cultural changes that enable and drive internal theft and the potential solutions to reduce its impact. Pre-employment screening, training, and the use of concealed preventative and detective methods will play an important part of the retailer’s loss prevention toolkit,” the report concludes.

Unfortunately, however, many retailers haven’t been heeding the warnings. According to the CGA study, 80 per cent of the surveyed owners of SMEs were unprepared to respond to employee theft, and 74 per cent of respondents said they believed their exposure to occupational theft was low.

Jewelers Mutual urges retail jewellers to remember that the threat of employee theft is real life, not just reality TV. We recommend store owners adopt a ‘professional level of skepticism.’ It is difficult not to trust those who have worked for you for years, but they are indeed the individuals who can do the greatest damage. Those employees know the most about the business, its cash flow, and its merchandise. They know how to ‘beat the system.’ We’ve handled many insurance claims from jewellery businesses victimized by an employee who had been with the company for years.

Jewelers Mutual believes that in all crime-prevention efforts, the best defenses are education, awareness, and preparedness with sound practices and procedures. For this reason, Jewelers Mutual has partnered with Jewellers Vigilance Canada (JVC), providing its insured clients in Canada free membership in JVC’s Crime Prevention Program. This JVC resource includes: alerts on dangerous jewellery crime; crime-prevention bulletins on effective security procedures; access to a database on criminal activity in the jewellery industry; crime-prevention videos; crime-prevention manual on CD; and access to the JVC security library. You may visit Jewelers Mutual’s loss prevention pages at www.jewelersmutual.ca/safetysecurity[3]. JVC’s Crime Prevention Program site is available at www.jewellerycrimecanada.ca[4].

David J. Sexton, CPCU, is vice-president of loss prevention at Jewelers Mutual Insurance Co., in the United States. A graduate of the University of Wisconsin, Sexton serves on the Underwriters’ Laboratories’ (UL) Security Systems Council, where he is a corporate member of the insurance category. He also sits on the board of directors for Jewellers Vigilance Canada (JVC), and worked on the Central Station Alarm Association’s (CSAA’s) Insurance Liaison Committee that assisted in the development of the UL burglar alarm modular certificate program and revised UL standard. Comments and questions can be sent to lossprevention@jminsure.com[5].

For training resources regarding safety and security when carrying or working with jewellery, visit JM University at JewelersMutual.com[6]. Jewelers Mutual Insurance Company is the only company specializing exclusively in jewellery insurance in the United States and Canada. It is licensed in all 50 U.S. states and Canada.

Source URL: https://www.jewellerybusiness.com/features/inside-job-is-your-greatest-loss-threat-right-under-your-nose/

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