Basic Premise

Many of us drive within the legal speed limit (or just slightly above it) only because we fear being caught and punished. Without that downside risk many would establish a habitual cruising speed above the current legal limit, with potentially catastrophic consequences for all parties. So strong detection systems, rules and their enforcement are a natural part of enjoying the benefits of a law-abiding society.

In the same vein, employers have a moral responsibility to put in place “strong detection systems, rules and enforcement” when placing assets (whether cash, stock or services) within reach of their employees – some of whom may live in a state of continual financial challenge.

It’s just not fair to tempt a person beyond a certain point and, in the context of a business, it’s just plain dumb to do so! Why? Because of the loss of assets? No, because the failure to be able to accurately identify a thief places everyone under suspicion, erodes team spirit and confidence and, often, will paralyse a business.

The damage to the business usually goes well beyond the value of the stolen goods.

The Cost

There is plenty of anecdotal evidence that employees are responsible for upwards of 60% of all theft suffered by small and medium businesses, and yet it is the easiest theft to manage.

As one of our clients has said, “I had to take a $20,000 hit in one of my retail sites before I realised how guilty I was of helping people to steal from me. It was a lesson well worth learning!”

21 Tips

Below we’ve assembled 21 tips for reducing employee theft, in many instances simply by reducing the temptation to cross the line. While many of these may appear to relate to a retail context, you will find they also have parallels in just about any type of business. We commend them to you.

1. Set an example of honesty yourself. As a leader of people, it is essential that you demonstrate what you expect of them.It should go without saying that employers or managers who cut corners; lie about facts, products or services; who don’t treat Customers, suppliers or staff fairly, are inviting those below them to follow suit.Less obvious may be the need to demonstrate honesty in matters such as drawing (your rightful) cash from the business – don’t do so in a casual fashion that would look exactly the same as a staff member’s stealing it! Instead, follow process. Use the petty cash system and lodge a docket; cash a cheque so that it’s recorded; or draw cash from an ATM. If you take stock, book it against a register or “sell” it to yourself against a loan or capital account so that staff understand that it is accounted for.Don’t do anything, yourself, that would compromise the accountability for inflowing cash (such as pulling cash from the till for lunch), but instead be the first person to respect and abide by the systems. Lead by example.
2. Background check everyone! So many smaller business operators are so inherently honest themselves that they find it hard to think the worst of anyone. They take people at face value, and don’t check references or prior employment history. It doesn’t work.Background check every intending employee as a matter of course.Gain their written permission to do so as a condition of their employment application employment.When checking their application, be wary of gaps in employment history; absence of references from past employers; or refusal by a past employer or referee to provide a reference or further detail when requested. If you strike the latter case, develop some questions that would enable you to infer a problem without requiring the other party to cross the line of the Privacy Laws.

   If doubts emerge, and yet the person you are considering looks to offer a lot, it’s probably time to engage an agency or trained investigator with access to police and other sources. It may involve a fee, but that fee will be miniscule in comparison to the ultimate cost of making a poor hiring decision.

   Let new applicants know some of the detail of the processes to which they are required to agree as a condition of their application, and don’t be surprised when some don’t proceed. Your process is already working – and this step cost nothing!

3. Create water-tight security systems. It is the employer’s responsibility to create systems that isolate and assign accountability so that the weak are not tempted and the guilty can be readily identified. To do less is to unfairly tempt people who, in other circumstances would act within the rules; and to create uncertainty in your own mind about who is innocent and who is guilty.Part of the collateral damage of not doing so is that good staff will generally not hang around if they are not trusted – so you lose them because of a lack of system and the misdeeds of a bad apple. That leaves you employing just . . . ?Our security specialists tell us that people who are likely to steal tend to deliberately choose employers whom they assess to be soft targets.Scary thought, huh?
4. Run your systems regularly. Make all staff aware of your security systems. Make it clear that there are the systems they know about, and the behind the scenes cross checks, reconciliation systems and auditing processes that will pick up any irregularity immediately.Having done so, you had better administer those systems, carry out those reconciliations and cross checks, and regularly query any discrepancies. The mere fact that you routinely ask for explanations of anything that is not a 100% fit with the systems confirms to all parties that you are doing your job and that the systems are in play.This last step is no different to your passing a police patrol car on the highway – a passive reinforcement that driving within the limit and abiding by the law is a good thing to be doing right now, and at all other times, even when you don’t see the officer.
5. Pay good wages. Pay peanuts and you’re inviting hungry monkeys to rifle your peanut jar!If you employ good staff but are not making sufficient profits to pay them above the market, you have to ask yourself whether you are doing your own job well enough (ask us how a Business Improvement Specialist can make the difference!)People have an innate sense of fairness and, if you are not paying them what they feel they are worth, they may be tempted to “top it up” from within the business. Much better if you take the initiative in this area than to tacitly invite them to do so.Besides, staff know when they are stealing and lose respect for themselves in doing so – but they also lose respect for you. How can you expect to command a good result in those circumstances?
6. Involve and educate your staff. Be prepared to discuss everything, from profit to wages and everything in between, with your staff.Invite their input. Make them part of a solution; that way, they can’t be part of the problem! If they sense that you value their input they will be more likely to align with you, and less likely to seek to “balance the books” or seek a “top up” outside of the system.As part of your staff education, ensure that all staff understand just what expenses have to be met from the seemingly huge inflow of cash from sales. Many less sophisticated staff members think you get to take it all home, forgetting the mountain of bills that you owe suppliers for stock, staff for wages and superannuation, and other providers for the products and services that run the business. If staff realise how delicate and thin profits are, they will feel a greater sense of balance between their pay packet and your slice of the takings.
7. Don’t make it easy. Ensure that you have simple rules in place about how stock and other valuables (including stationery, equipment and consumables) are to be handled, and where they are not to be taken – for example, to staff areas, change rooms, lunch room or outside of the premises.These rules may include, in a retail context, excluding employee bags from counters or other areas where small stock and other valuable items are stored; signing for any equipment or assets that are removed off site; etc.
8. Have clear, tight refund, exchange and warranty policies. Make sure there is a clear and watertight paper-trail for extraordinary movements of money and stock such as occur when purchases are refunded, goods are exchanged or other goods or services are provided for lower or no payment.
9. Offer employee discounts. It’s an easy matter for you to pass goods and services to your employees at a discount and the real cost is neglible – in fact there may still be a small direct profit in doing so.You may also be able to extend this to providing access to a range of goods provided by your suppliers that you don’t normally trade in, and even discounted access to the products and services of some of you business clients.Here you are demonstrating care for your team, passing a financial advantage and adding value associated with the job, all of which encourage fairness to your in your team.
10. Rotate responsibility for running and auditing your security systems. The stories of the faithful bookkeeper who hasn’t taken a holiday in 10 years, being found guilty of embezzling a million dollars are legion! They didn’t take holidays because, if they did and some else did the books in their absence, their manipulation of the system would have been discovered!So, mix rosters, rotate responsibilities, and enforce holidays.
11. Don’t encourage collusion. When rostering staff for duty, don’t allow friends to consistently work with friends; instead contribute to building a broader network of relationships across your team while also increasing your security by rotating partners particularly when one party is collecting and another checking money, stock or other valuables.
12. Spot check. Randomly select a day in which you check every aspect of the value flow within your business. Cross check receipts against takings; invoices against receipts; stock movements against sales.Instruct that all items across the point of sale will be scanned rather than hot keyed on one shift or day, to check for practices such as selling a high value item to friends by keying it as a lower value item.This not only keeps you on your guard, but lets staff know that you are monitoring and enforcing the systems (the police car parked behind the billboard again!)
13. Spend time in the trenches with the troops. The practice of having management periodically (randomly) spending time at the coalface of the business, in the trenches with the troops, is invaluable from on number of counts:

    a. It provides management with an up-close view of the workings of the systems.
    b. It provides direct contact with Customers and direct observation of staff’s interaction with Customers.
    c. It uncovers inadvertent or deliberate abuse of steps in the accountability systems.

    Any one of these counts make this practice worthwhile. All in combination make it just good business!

14. Balance cash in the middle of the day. Occasionally balance every till and cash holder in the place in the middle of the day, rather than at the end of it. The break in routine demonstrates that you are actively checking the systems, and broken routines make (internal and external) thieves nervous.That’s good for the business.
15. Stock take cyclically. Most stock is monitored by computer these days (or should be, since it’s so easy), so there is little justification for doing a massive stock take once a year.Instead, break stock into logical categories or lots and stock take 8% every month (all stock will be checked once in the course of a year), or 1% of stock every day (the equivalent 2.5 full stocks a year!)
16. Don’t allow staff to ring up their own purchases. Instead they – and you – follow due process, walk around the front of the business, and have another staff member run the sale.
17. Don’t permit employees to sell to their friends or family. Same rule as above – follow the processes.
18. Seek expert theft prevention training and advice. There are many business security experts out there (one of our acquaintance, Phoenix Global, is headed by an extremely competent former police detective and offers a wide range of services to business clients – and has an excellent newsletter!)When it comes to the collateral damage done to morale and team confidence, theft prevention is one area where there is no doubt that “a gram of prevention is worth a kilo of cure”!
19. Popularity is not a plus! When it comes to identifying the guilty party in cases of employee theft, there is strong anecdotal evidence that the more popular the employee the more likely they are to be the one stealing from you.You can often double that rule when the employee has invested a lot of time into being popular with you or their manager, without the same attention to their relationship with other team members. Besides, other staff may smell a rat, and resist their advances, but managers, being one step or move removed from the action, are an easier (and more useful) mark.
20. Share your suspicions. If you suspect you have a theft problem, take all of your team into your confidence and ask for their help. 97% of people are inherently honest, and that 97% will work with you to monitor any situation in which you suspect foul play.At best it may uncover evidence of a thief; at worst it may discourage one from trying, or minimise their activities.
21. Install passive security systems and use them. The advent of cost-effective surveillance systems makes close circuit TV monitoring of high risk areas logical. If you do install such systems, seek legal advice to ensure you are within privacy guidelines, and then monitor the output, and make it obvious to staff – and other visitors to your business – that you do.Don’t be one of those who invest in the money in hardware but won’t invest the time into using it.

A Sobering Tale

More than 30 years ago a massive case of employee theft was reported by one major US company – their relatively junior Mail Clerk had embezzled more than $1,000,000 from their Petty Cash Fund!

Now, you might ask, “$1 million! From petty cash? But how?!”. Well, the circumstances that preceded it demonstrate just how easy it is to fall behind the times, get out of touch with evolving needs and let a gap open in your defences – in much the same way that we all face evolving gaps in our business defences these days along the technology frontier.

But, back to our Mail Clerk: in the 70’s, when snail mail was the norm, it had traditionally been managed by drawing small amounts of cash from a petty cash tin, taking it to the post office, buying stamps (or, if you were really sophisticated, having your franking machine charged), sticking them on envelopes, putting the postage purchase receipt into the petty cash tin to balance the funds, and recording the mailing. Transactions were then recorded in the Petty Cash Register, totalled, a reimbursement cheque requisitioned from the accountant, and the cycle repeated.

Because of the menial nature of mail and the relatively low values it involved, balancing the Petty Cash Register was usually assigned to a junior staff member and was audited, often very cursorily once a year, by the accountant around the end of a financial year. In the meantime, throughout the year, petty cash reimbursement cheques were issued almost as a matter of course, and without auditing or control.

The company we are talking about here underwent rapid growth, acquired a number of other companies and, as an economy measure, brought all of their mail handling into one location and, as tradition would have it, placed it under the control of a junior Mail Clerk. The gap opened wide in this case because the consolidated mail bill was now more than $1,000,000 a month and, yes, Petty Cash reimbursements were issued as a matter of course against a junior employee’s unchecked requisition.

The temptation proved too much and the young staff member fell victim to it – next thing you know, several million dollars had gone missing from petty cash!!!

Still, that was “the old days” and you can thank your lucky stars that that can’t happen in your business in this electronic era . . . . . . or could it?

It’s sobering to consider the level of electronic fraud that the banks and credit card companies currently tolerate as “the cost of doing business”, in much the same way as your local council might accept a small percentage of leakage from their water mains. Both parties view the level as “not worth fixing.” In the Sydney area, the council’s losses are estimated at around 30% of total water inflow; in the banking and credit community it’s nowhere near as high – only .5% – but, then again, that’s $25 billion a year world wide.

I suppose it depends on how you want to look at it!

Interesting Link: http://www.aic.gov.au/publications/rpp/60/executiveSummary.html

Peter Rowe is the Managing Director of ProfiTune Business Systems, one of Australia’s foremost Business Improvement Specialists whose clients include both multinational corporations and small private companies across every quarter of the business arena. Peter’s new book ‘Solving the People Puzzle’ is due for release in 2010.

www.profitune.com

Tags: cap staff temptation, employee dishonesty, employee fraud, employee misconduct, employee stealing, employee theft, theft by employee, tips cap staff temptation

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