Article > Operations

Controlling Store Shrinkage

By John Rogers

One out of three steals at work. Heres how to combat the problem.

One out of three workers steals from an employer. Such staff sleight-of-hand costs businesses more than $50 billion a year, according to the U.S. Department of Commerce. Nine out of 10 businesses say they have suffered employee theft of some kind. How much is involved? The average dishonest employee steals seven times what a shoplifter takes - $765 vs. $114.

How do businesses survive such a drain on profits? Many don't. One-third of small business failures are caused by internal theft. The other two thirds manage to deter and solve employee crime with expensive surveillance and detection costs, which ultimately must be passed onto customers.

Who are these employee thieves? Usually such employees share three traits: motive, which often is pressure from an overwhelming financial obligation; too little compensation, be it real or imagined; and opportunity. In other words, the thief needs the money, feels underpaid and seizes an opportunity.

About Pilferage
Employee theft comes in many forms, and the most common is pilferage. Owners and managers should avoid setting a double standard regarding company supplies and merchandise. Helping yourself to merchandise without paying for it should never be done by the owner because the employee then thinks, why shouldnt I?

Other tips for curbing pilferage:


  • Never let employees take inventory alone in the department where they work.

  • Inspect at irregular intervals all rubbish piles and garbage containers.

  • Adopt a tough, zero-shortage policy, and announce it even if you realize that writing off a certain percentage due to pilferage is acceptable.


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

We know of one small businessman who lost $60,000 the first year after he bought his business because a shop supervisor organized a theft ring. She insisted that every counter employee participate in order to prevent anyone from blowing the whistle. She told each staffer how much to take daily, ranging from $10 to $20 each.

Payroll Ghosts, Kickbacks And Inventory Fraud
Cash theft from the register or before the money is rung up usually is easy to detect. But there are also other theft methods: lapping, accounts-payable juggling, payroll ghosts, kickbacks and inventory fraud.

Lapping involves diverting money, usually checks, from a customers account into an employees account. Then to cover the first theft, money may be transferred from a second customers 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. Amazingly, vendor fraud and administrative error account for 20 percent of shrinkage.

Paying The Long-Gone Employee
Payroll ghosts can also haunt even a small business by someone who has access to the books. The ghost technique may be as simple as keeping a discharged or resigned employee on the books for an extra payroll period and pocketing the extra pay. Of course the amount must be entered on the employees W-2 form, but few employees check their W-2s closely.

Kickbacks are perhaps the most difficult employee thefts to detect and among the most common. It involves the employee taking bribes from vendors, often in cash, which leaves no paper trail. The kickback or bribe may be something as simple as a gift of merchandise, which is often considered a way to grease the business wheels. Such a gift is actually theft if unreported to the employer who might want that extra supplier consideration to be used to reduce prices instead.

Back-Door and Front-Door Theft
Inventory fraud may involve buying more than what 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. A general recession or tough times for a store usually escalates employee theft because wages have often been depressed.

Cost-control measures often reduce staffs, so there are fewer supervisors to watch the staff and there are more temporaries or part-timers employed, which means less employer loyalty and hence more theft.

Hiring Right is the Best Deterrent
The best theft deterrent is to avoid hiring a potential thief in the first place. You might consider telling all job candidates that they are subject to random drug testing because drug users often steal to support their habit. Even if you dont test, the mere threat will weed out some undesirable candidates.

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

Another theft deterrent is the distribution of a written employee-behavior plan with a signature required. Announcing that the premises are monitored by hidden cameras may also stop a would-be thief. One theft victim said that having the police come in to arrest an employee on the premises was the biggest deterrent of all.

Some Sleuthing Tips
Here are some specific theft clues:


  • An increase in overall sales returns. This could be due to defective merchandise or tinkering with accounts receivable payments.

  • A decline in cash or credit sales. This may indicate that business is souring or a thief is present.

  • Inventory shortage may be either error or employee pilferage.

  • Frequent customer complaints of inaccurate statements - could be due to sloppy or fraudulent bookkeeping.

  • Employees with living standards much higher than their earnings justify. This could be because the person won the lottery, or are they your silent partners?

  • Merchandise concealed in areas open only to employees.

  • Consistently lower receipts on certain shifts.


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

Insist that all employees take a vacation, and be wary of anyone who resists, particularly if in a sensitive financial position. Monitor that position closely to compare results during the absence.

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. Dont assure yourself that checks made out to your company cant be converted into cash by an employee. You would be amazed at how simply 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 canceled 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.

Control the Keys
Initiate a program of key control. Only a few should have access to business keys, and they should be monitored closely. They should be advised that with a key goes responsibility for anything missing.

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 retailers turn to a professional shopping service to make purchases to see if the receipts are rung in the register.

What should you do when you suspect an employee is a thief? Proceed carefully but promptly. Dont try to play policeman. Get advice from your attorney, police department or your insurance company on how to proceed. You may be able to help in the detection process by surveillance. However, thats as far as you should personally go.

When you do turn to the authorities, be prepared to prosecute. The police or the district attorney wont be eager to pursue a case if you refuse to testify. The authorities attitude will also vary with the size of the theft. You should consider prosecuting every theft case as a deterrent to others.

However, dont leap to any conclusions when it comes to suspected thefts. What may seem to be an embezzlement may have a valid explanation, and your false accusation could lead to serious civil liability.

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.

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