Investigating Theft in Retail Organizations

In an industry where a 1% change in gross margin can mean millions of dollars, retailers have begun focusing greater energy on mitigating losses caused by employee theft. Employee theft has become a problem of increasing significance for retail organizations over the past few decades. In 2004, the European Theft Barometer report showed an increasing prevalence of employee theft in retail organizations, up 1% from 2003 (Technology Tackles Employee Theft, 2005). It's been estimated that "the outcome of employee deviance and delinquency accounted for between $6 and $200 billion of organizational loss annually" (Lau, Au, & Ho, 2003). Employee theft can be loosely defined as any behavior by an employee of an entity that is intended to produce detrimental financial outcomes for the employer. This includes pocketing cash, stealing inventory, using company resources for personal gain, and other deceptive tactics. Most modern day retailers are at some level of risk as motivation and opportunity make theft an attractive choice for many employees. While large organizations have focused on this problem for several years, many small businesses have not devoted the time and resources to addressing this problem. Small businesses may be at particular risk due to a lack of high-tech internal controls that larger organizations may have. Additionally, small businesses often "frequently deal in cash - the easiest temptation of all to a dishonest worker" (Biddick, 2004). Consequently, small businesses must pay special attention to this problem in hopes of diminishing the risk (Biddick, 2004).

Understanding the motivations of an employee that engages in theft can be an essential means to changing the circumstances and situations that might encourage these harmful activities. Employee motivations can be classified into three main categories: personal, organizational, and economic factors. Personal factors include such items a person's individual viewpoint on and reactions to such items as job satisfaction, relationship with co-workers and employer, and one's perceptions of the work environment (Lau, Au, & Ho, 2003). These are all factors that will differ based on the employee. Organizational factors refer to the controls placed in the work environment. These include the broad "Control Environment", as referred to by the COSO framework of internal control and general and specific controls used to combat employee theft. Certainly an organizations anti-theft policy can be a mitigating factor in reducing this risk. Economic factors suggest both the financial position of the individual as well as broad economic conditions such as unemployment rates, inflation, and purchasing power have an effect on an individual's decision to steal (Lau, Au, & Ho, 2003).

With regard to personal factors, "findings have been consistent regarding the relation between job satisfaction and employee theft" (Lau, Au, & Ho, 2003). Workers, who are dissatisfied with pay, the work environment, the duties of the job, or the people they work with, are most likely to internally justify stealing. Studies on economic factors produce similar results; showing that "workers who hold low paying, low-status, or boring jobs behave similarly as dissatisfied workers" (Lau, Au, & Ho, 2003). Therefore, organizations should pay special attention to hiring individuals who are not overqualified or lack internal drive and energy. They should also attempt to create an environment that is positive in terms of the social environment as well as a culture of integrity. This means the company should act ethically if it expects its employees to do so. Important also is the creation of a pay and promotion structure that reduces turnover by increasing employee growth and prosperity.

Because employees are less likely to steal in an environment with strong controls that monitor actions, perhaps organizational factors are of equal relevance as economic and personal factors. There are several techniques related to organizational factors that an entity may use to reduce theft and loss risk including: risk assessment, surveillance, exception reporting, segregation of duties, frequent monitoring of financials, awareness of potential kickbacks, and the use of a reward system.

The first step is to assess risk by understanding where the organization is vulnerable. Businesses, especially small businesses, need to focus on times when an employee is unsupervised, locations where employees are unsupervised, cash transactions occurring without supervision, bookkeeping controls (such as segregation of duties), and instances where an employee might feel underpaid. By assessing risk, the company will able to focus some efforts on minimize the risks using additional internal controls.

One such internal control commonly used is video and audio surveillance. Relatively cheap over the long run, video surveillance can be an effective way of monitoring unsupervised employees (as well as customers). Organizations are increasingly turning to a complementary system of exception reporting along with visual surveillance. Because employee theft often occurs at the point of sale, a "smart analysis of data can detect patterns" and point out transactions that are outside the norm (Technology Tackles Employee Theft, 2005). Using the video tape, employers can view the transactions reported by the data analysis. Such a system may be a significant deterrent against point of sale theft.

Another internal control that works to positively influence the control environment is the use of a reward system designed to recompense employees "for reporting theft" (Tryon & Kleiner, 1997). A reward system works by providing incentive for innocent co-workers to come forth and report misbehaviors. It also expressly indicates to the employees the importance of employee theft (Tryon & Kleiner, 1997).

Once an employer discovers or suspects that theft has occurred, they must decide on a course of action that is most pertinent to the situation at hand. The first step is to perform a cost-benefit analysis to determine the level and type of financial and time resources the organization is willing to expend on the matter. It makes no sense for a company to spend $4,000 to uncover a $50 crime. Thus, a private investigator is useful only in cases where the dollar values are very high.

Alternatively, an internal investigation is often appropriate and effective in uncovering the truth. The first step is to create