The other day I read a news story about “an elaborate, decade-long scheme to steal more than $4 million from Building 19 stores.” The scam, which started in 1996, allegedly involved fictitious purchase orders and phony invoices for rugs. Authorities say a buyer, a warehouse employee and even a few outside suppliers were in on it. After an in-depth investigation by Massachusetts State Police and the state’s Attorney General’s Office, five people have been indicted. One who has so far pleaded guilty got three years probation, a $5,000 fine and 150 hours of community service. Think about this and ask yourself: Could an employee steal millions from me?
The fact is employee
embezzlement and theft is far more prevalent than many of us like to think.
Each year, it is estimated that American retailers lose more than $33 billion
to customer and employee intentional theft (and that does not even include
human error). As a retailer, you want your products to fly off the shelves and
out the door – but only after they have been paid for.
During my 50 years working
with flooring dealers, I’ve sadly witnessed too many dealers sapped by employee
theft. Some were forced to fold; others worked for years to recover, while
sacrificing much. Consider the plight of one Midwest dealer who lost $800,000
to an embezzler-who also happened to be on the payroll!
What’s the actual cost of
employee theft to an operation? Let’s say your Net Profit was 3% (average in our
industry) and a member of your staff stole $10,000 from you - you’d either have
to reduce your take-home pay by about $12,000 (with payroll taxes), OR sell an
additional $333,333 in the course of the year. How many more years would you
have to work to sell that much more? (To calculate how much more, divide the
amount stolen by your Net Profit percentage.)
A national fraud expert
counsels us to be alert to the three conditions that invite fraud: 1) the
employee feels financial or emotional pressure to take extraordinary measures;
2) he/she perceives an opportunity to steal and get away with it; and 3) the
embezzler rationalizes. Embezzlers
start small and tell themselves, “It’s just this one time” … and they promise
themselves, they will pay it back. As the
amount grows, they realize they cannot.
Recently, a flooring dealer
told me of a customer who called to complain about a problem with her floor.
The owner couldn’t find the original invoice, so the customer showed him hers.
Written across the top was “Paid in Full” with the signature of a part-time
salesperson. Neither the invoice nor the money ever made it back to the
I urge you to review your
business systems. Do you have in place effective checks and balances? America
grew to become a great country and we have protected ourselves from despots
because the Founding Fathers wisely adopted a system of checks and balances.
Trust everyone who seems trustworthy, but maintain financial controls.
Start with your hiring
system. Prescreen applicants for criminal records, credit history, and
relationship problems (sexual harassment or violence) in prior jobs. Use this
system for every new hire, even those you know well or are recommended. Janice
Clifton, owner of Abbey Carpets Unlimited Design Center of Napa, Calif.,
recalls how she was burned when she hired a friend to manage the
warehouse: “I never worried about
trusted employees, so for them I didn’t have checks and balances. That was a
big mistake.” Her “friend” the
warehouse manager stole for years. He
was caught only when someone tipped off Janice. She then verified the thefts by
installing video cameras in the warehouse. It cost Janice hundreds of thousands
Another example of
unjustified trust was a temp who “was like one of the family.” In fact, this worker felt so comfortable in
her new surroundings, she used company checks to pay her bills. It is
exasperating for a business owner, but much the way you have locks and alarms
on the door, avoiding employee theft is mostly a matter of taking precautions.
closed-circuit video cameras in the warehouse and outside over the loading
dock.Make certain the tapes are secured each day.
• Use point of
purchase software.Require all bids and sales to go through your accounting
software. Eliminate paper bids that can be turned into invoices.
• Require that
every cash sale, no matter how small, be entered into your accounting software.And require a signed voucher for every cash drawer disbursement. I know one
retailer who gave two crisp $50 bills to neighbors and asked them to buy
accessories and remnants at his store. The next day, neither bill was in the
cash drawer. Taco Bell fights employee theft by posting a sign in its
drive-thru windows: “If you don’t receive a receipt or the amount doesn’t match
what you are asked to pay, please call 1-800 …”
• Rotate employee
assignments to prevent collusion.Require every employee, including
your accountant and bookkeeper, to take vacations, so that someone else has to
handle their work for a period. (They may notice irregularities.)
• Make sure the
person who writes the checks is not the same person who reconciles the bank
• Take a physical inventory
every quarter.In addition, have non-warehouse employees make surprise
counts of inventory. Compare these counts with inventory records.
• Check daily cash
flow against accounts receivable and items sold.
• Randomly monitor
high-volume items, such as roll inventory that is continually stocked, cut and
• In your employee policy
manual, clearly state that you will prosecute any employee theft.
• Read your financial
statements by the 5th of each month.Search for irregularities.
Another retailer noticed his average gross margin was 10 percentage points
below what his marked prices should have produced. My answer: product is probably disappearing out the
These are only some of the
ways you can guard against theft. Consult your outside accountant to help you
design additional controls.
One final thought: I advise
you to treat all your employees with respect and trust everyone who seems
trustworthy. But always maintain controls. Employees will understand that these
controls are meant to help everyone be honest and eliminate even the temptation
Theft controls, used consistently, can eliminate the
opportunities for theft. I hope you are not the next victim.
Habit: Theft-proof your business
October 17, 2007