Preventing Employee Theft - Training the Internal Watchdog
by Kevin Terrill
I try to make every day in life the best day possible -- and I usually succeed. Sometimes, however, my expectations for the day are exceeded -- through no fault of my own . . .
Several weeks ago I received a telephone call from a University of Texas student, Kevin Terrill. Kevin explained that he was working on a project involving internal theft and he asked to interview me. I get interviewed frequently and I generally enjoy those times. Kevin was well-prepared, organized, to-the-point and considerate -- we finished in less than an hour. Kevin promised to send me his final paper after he submitted it.
Kevin's paper follows -- and his final product is impressive. My message back to him follows. If you also learned some things and appreciate his effort, please email him back and let him know. It's email@example.com.
Dana Turner -- BOL Moderator
Shhh! The Watchdog is Sleeping
At some point in everyone's life they are confronted with the eighth commandment: Thou shall not steal. Mine came during high school. I had several friends who worked for various businesses, one of them at a fast food restaurant. Every Friday at midnight, my other friends and I would visit him with empty stomachs. We would pay for the cheapest item on the menu, a 49-cent cookie, and he would give us all the food we wanted. We never gave one second of consideration to the effect of our actions. My story is not uncommon, and it should create concern. Even though it is not often talked about, internal theft is one of the most serious threats facing business today. Management can prevent employee theft through a combination of six proactive steps aimed at protecting a company within.
It's Wake Up Time
Why should a company invest their time and money in loss management? No business that maintains an employee base is immune to internal theft, a problem linked to 30% of U.S. business failures (Mullen 1). It affects every industry on every level. One striking fact about employee theft is that it exceeds shoplifting. Employee theft accounted for over 41% of inventory shrinkage, while only 35% was attributed to shoplifting (Mullen 1). A reason for this is because companies started to direct their attention to and have successfully reduced shoplifting.
Another reason for implementing a loss management plan is the actual loss companies face because of internal theft. The average U.S. business looses about 6% of its gross revenue to fraud and theft, or about $400 billion annually (Turner). This substantial loss eats away at the profits of the business community.
Finally, internal theft is a problem that is growing every year. In 1999, banks filed over 5,100 suspicious embezzlement reports and in 2000, they filed over 6,100. Embezzlement is defined as the misuse or misappropriation of funds or property entrusted to an employee. It is the trust given to employees that provides the crutch for supporting internal theft.
So, why do employees take advantage of this trust and bite the hand that feeds them? According to Dana Turner of Security Education Systems, there are three fundamental reasons why employees steal from their employers.
The first reason is a need for money to support a life>
A second reason why employees steal is for revenge. Often employees are irritated about their current situation or angry towards the people above them and steal as a means of getting back at the company. Employees that steal for this reason are usually not thinking clearly and act in the moment.
The third reason credited for internal theft is the excitement employees get when they steal. Employees that steal for this reason get an adrenaline rush from the risk of being caught. They consider it a game and often have no true need for what they steal. Being aware of the reasons for theft provides a platform for preventing it.
Theft Prevention in Six Steps
There are several steps involved in implementing a loss management system aimed at preventing internal theft. Each step is equally important and interdependent.
Step 1: Human Resources / Knowing your Employees
The first step in preventing employee theft starts with human resources. The best way to prevent an employee from stealing is not to hire them at all. This means that better attention and focus should be paid when hiring an employee. The average interview in the retail industry lasts only about 20 minutes (Farr 5). Companies need to develop an effective pre-employment screening process. This should include doing extensive background checks that include examining of criminal records and checking references. The new applicant process should be completed with due-diligence. Most embezzlers have stolen from the their last four employers prior to discovery (Turner). Therefore, it is important to detect anything questionable, because internal thieves maintain their illegal activity from job to job. If time is an issue, you can outsource the service of performing background checks. ProMesa is one such company that is "customer service-driven and committed to providing accurate, innovative and cost-effective background checks"(ProMesa 2).
Human resources should also discuss internal theft and loss prevention during the hiring process. The employee should be told during orientation how important loss management is to the company. Human resources should also let new employees know that the company's theft prevention measures are tools to protect employees (Turner). If prevention measures are too lax, then everyone becomes a suspect when something is missing. Understanding a company's reasoning will help employees feel less threatened and more like a member of the team.
Step 2: Building Company Culture
In order to maintain a workforce that resists stealing from the company, a "culture of honesty" must be created (Mullen 6). This is included in the second step to preventing internal theft, building awareness. To build awareness within a company, the organization must communicate with employees about inventory shrinkage and theft issues. Creating a culture of honesty also involves creating performance measures based on ethical behavior (Mazur). In order to generate ethical behavior, management must first clarify the company's code of conduct and identify unacceptable behavior. Then the company can implement more specific requirements. These include holding managers and supervisors responsible for maintaining performance management issues. Another way to keep employees align with the company's conduct code is to give them a greater sense of authority (Mullen). When employees are given more control, they are more likely to do what is in the best interest of the company.
Another way of creating a more truthful culture within an organization is to provide a means for employees who observe illegal or inappropriate behavior a way to report them. KPMG performed a recent survey of 2,390 employees from a variety of industries on Organizational Integrity. The survey found that over 80% of the employees had observed a high level of illegal or unethical conduct over the past 12 months (Mazur 12). One solution to this problem is for a company to provide a confidential 1-800 number hotline where employees can report observed theft. Offering a hotline number is another service that can be outsourced to another company. One such company, EthicsLine, states "organizations having fraud hotlines in place cut their fraud losses by more than 50%." Providing this outlet helps to maintain an honest workforce. This is key because Dana Turner of Security Education Systems states that often times employees steal when they are aware of other employees' embezzlement activity and ask to become temporarily involved (Turner).
The last piece of the puzzle to building an honest culture involves building the overall attitude of the employees. Employees who have a respectful attitude are less likely to steal because it is hard to violate the trust of a good boss. Creating a company culture that is happy and satisfied will reduce the revenge factor in internal theft. One way to build employee attitudes is to share in the ownership of the company. Employees who own stock will act in the best interests of the organization because they are now acting in their own best interests. Even with the best company attitude, it still takes deterrents to prevent internal theft.
Step 3: Integrating Technology
The third area of focus in preventing internal theft is technology. It is simply not enough to have a loyal and committed company culture. Good loss management systems reduce the opportunities for theft to occur. One of the most effective technologies is the use of cameras. An employee will be reluctant to steal if there is always someone monitoring his or her actions. As stated earlier, it must be explained to the employees early on that the cameras and other devices are in place to protect them. Explaining it in this manner builds understanding and reduces the "Big Brother" atmosphere. Plus, an employee shouldn't be too concerned if they are not doing anything wrong.
A new technology that is being widely implemented by financial institutions, supermarkets, and retail stores is point-of-sale exception reporting combined with digital video (Mullen). Companies like Circuit City have chosen this high tech solution, called Digital Datacatch, to tackle internal theft (O'Mara). The benefit of installing a system like this is that it captures video and data all the time and files it on a large hard drive. Then, when there is a questionable transaction, management can view the occurrence within seconds. Digital Datacatch is a "proactive" use of technology (O'Mara 4).
Another way companies can use technology to prevent opportunities for theft is by restricting access to certain areas and information. Employees should not be allowed into certain areas or to view certain pieces of information unless it is absolutely necessary. A company can restrict access by several ways. Dana Turner suggests using devices like electronic keys or thumb print signatures because they are the most affective. With limited access, a company can protect its employees by reducing the number of suspects once something is missing. Controlling contact to certain information also reinforces a system of checks and balances by ensuring responsibility in particular employees.
Finally, implementation of certain technology must be done carefully. The most effective way to utilize loss prevention tools is to limit employee awareness of them (Turner). The primary objective of using such equipment as cameras is to deter an employee from stealing. The second objective is to catch employees who are stealing. If a system is completely known, employees will work around it to embezzle. By identifying only a few technological measures, the company discourages internal theft while protecting themselves from those willing to take the risk.
Step 4: Aiming at the Target
The fourth step in developing an effective loss management system involves the act of targeting. Targeting in the context of preventing internal theft has two meanings. The first consists of focusing on high-risk merchandise and locations. Often, 10% of a store's inventory accounts for as much as 40% of the total store's inventory loss (Mullen 9). Attention and prevention measures should be centered on items that are the most expensive and easiest to steal. Such items include jewelry, leather, and small consumer electronics. The most important item a company should direct its focus on is its most liquid asset: cash. Managing theft of money is particularly important for banks. In 2000, embezzlement contributed to the failure of the $88.8 million-asset Bank of Falkner and the $113 million-asset Hartford-Carlisle Savings Bank (Thompson 22).
Targeting also means being aware of the potential warning signs of internal thieves. There are several behaviors that can cues a company that a problem exists. Mr. Turner of Security Education Systems states that there is often a marked change in both the embezzler's behavior and appearance due to the guilt and anxiety caused by the criminal activity. Therefore, in order to recognize when there is a change, management needs to record the employee's behavioral baseline state or the employee's normal range of emotional and physiological state. An important thing to note here is that this type of targeting should be done at all levels of the employment throughout the company. The fraud examiners association found that lower-level employees committed about 80% of all corporate fraud, but took only 20% of the total money stolen (Thompson 11). According to this statistic, more attention should be focused on higher-level employees because they cause the most loss. In fact, on average, managers steal $250,000 and officers and owners take on average $1 million (Turner). There are several other warning signs exhibited by internal thieves. The important thing is management needs to be more aware of employee's conduct and actions because they can be excellent indicators of fowl play.
Step 5: Keeping A Watchful Eye
The fifth step in preventing internal theft is auditing and monitoring the previous four areas. No prevention step can be truly effective if it is not frequently checked and observed for flaws. "In order to expect a lot, [company's] need to inspect a lot" (Mullen 10).
It is important to make sure that the human resource department has not lapsed in performing the pre-employment screening process. This process should be highly monitored during major hiring periods. An important step, which is often forgotten, is maintaining a culture of honesty. Conducting regularly scheduled ethics seminars is a way to constantly instill the company's expectations in their employees (Farr). It is also key to follow up with employees who report witnessing illegal or unethical behaviors by fellow employees. A survey by KPMG found that 61% of employees who witness acts of wrongdoing fail to report them because they don't feel management will take action (Mazur 4). It is important to keep a workforce honest by remaining true to your word. It is also vital that businesses monitor their prevention technology. There is a lot of criticism about spending money on tools like surveillance cameras because they don't provide a decent return on investment (Brandman). This is true if you don't use the technology on a regular basis. Internal theft prevention technology can be very effective, especially if employees realize that it is constantly being monitored. These steps are interdependent. Failing to ensure one prevention step can minimize the synergistic effectiveness of all of them combined.
This area of focus also includes constantly monitoring and auditing inventory levels. Keeping track of inventory loss on a weekly or even daily basis will ensure knowledge of the current situation. This will allow you to take appropriate actions immediately and prevent the seriousness or the magnitude of the loss. A possible way to manage inventory levels would be to hire a program manager responsible for this specific task. It can be a daunting task and therefore worth spending the money for this position. Knowledge is power, especially in the battle against internal theft.
Step 6: Building the Power of Knowledge
In order to establish an effective loss management system, managers needs to better understand the problem of employee theft, the sixth step of the process. According to Dana Turner, "Businessmen learn how to make money, not keep it." Preventing internal theft is a topic that is not taught in school and has only recently been discussed. It is important that management or courses in management include more detailed loss prevention subject matter. Introducing new business people into the business world without knowledge of handling in
ernal theft will only perpetuate the problem. When people know more about this field, more attention will be focused on internal loss, and employee theft will be reduced.
Major merchants, such as Wal-Mart, Kmart, and Target, have already developed complex loss prevention departments (Far). Several trade organizations, like the Association of Certified Fraud Examiners and the International Mass Merchants Association, help companies who are starting to implement internal theft prevention measures. These organizations provide facts and background information about employee theft and introduce ways to help reduce the problem. Being familiar with internal theft is key in reducing this $400 billion a year problem.
That's a Good Doggy
Employee theft is a growing problem that can no longer be swept under the rug. To ensure growth, the business community needs to fight back against internal theft. Companies can better equip themselves for this battle by implementing the six-step loss management system. With these tools, any business can release their well-trained internal watchdog on the most elusive internal thief.
Train your employees
on the consequences of embezzlement.
This video training program relates what happened to an employee who had a need that overcame her better judgment. It contains a powerful message about what happened to her life at the time and now, ten years later. The video underlines the financial institution's policy of zero tolerance. Order NOW in the Banker Store.
Thompson, Laura. "Are Small Banks More Vulnerable To Internal Theft?" American Banker Vol. 166 (2001): p11A, 2p, 1c.
O'Mara, Deborah. "A Digital Solution To Retail Security." Security: For Buyers of Products, Systems & Services Vol. 38 (2001): p38, 1p, 2c.
Mazur, Tim. "Culture Beats Internal Theft." DSN Retailing Today Vol. 40 (2001): p14, 2/5p.
Keenan, Mike. "Scoping Out The Stockrooms." Security Management Vol. 45 (2001): p74, 2p, 1c.
Farr, John. "Loss Prevention Musts." Chain Store Age Vol. 75 (1999): p116, 2p, 1c.
Mullen, Fred. "Six Steps To Stopping Internal Theft." Discount Store News Vol. 38 (1999): p12, 3/8p.
Brandman, Barry. "Must See TV." Food Logistics 15 Jun. 2001: 52.
EthicsLine. EthicsLine. 1 Mar. 2002 http://www.ethicsline.com
Promesa Employee Profiles. Promesa. 1 Mar. 2002.
Turner, Dana. Personal Interview. 3 Apr. 2002.
Projected Payment Time Frame. Social Security Administration. 19 Apr. 2002
Kevin Terrill was born and raised in the city of San Antonio. He decided to remain in Texas and continue his education at the University of Texas at Austin. Currently, he is a third year undergraduate in the Red McCombs School of Business and a member of the Mitte Business Honors Program. Kevin plans to pursue a degree in Finance and Radio-Television-Film along with his Business Honors degree, and hopes to attend law school and practice either corporate or entertainment law. Contact Info: Kevin Terrill; 1515 McKinely; San Antonio, TX 78210; 210-857-8881; firstname.lastname@example.org
First published on BankersOnline.com 6/9/02.
First published on 06/09/2002