Asset turns liability

One of the greatest problems for a retailer is when goods leave the retail store or the warehouse without a matching payment. In retail vernacular, it’s called ‘shrinkage’. Retail shrinkage is the difference between ‘book stock’ and ‘actual stock’. So, we can say it is the unaccounted loss of retail goods. Shrinkage is an industry hazard. Generally, shop lifting by customers is thought to be the biggest theft. But, in reality, internal theft or employee theft is the biggest cause of retail shrinkage worldwide. In the words of Mr NV Sivakumar, Executive Director and Leader, Consumer and Industrial Products and Services Group, PricewaterhouseCoopers India, Shrinkage has multiple meanings, depending on the context. Shrinkage can be defined as an inventory recorded on a company's books but not on hand, due to theft, loss or accounting error. In retailing, shrinkage (sometimes truncated as shrink) is the loss rate of products between point of manufacture and point of sale. Often, it is considered a cost of doing business in retail.”  Everyone in the retail world is aware of employee thefts. However, their scale or quantum has rarely been measured or admitted by retailers.

 

Stores scenario

Scale of retail shrinkage in stores has been increasing day by day. Mostly stolen items include branded and expensive products like cosmetics and skincare, alcohol, women's apparel, perfumes and designer wear. Other exceedingly stolen objects include razor blades, DVDs/CDs and fashion accessories. Lingerie, batteries and small food items are also some of the products stolen. The rate of retail shrinkage helps determine the progress of the business.  Shrinkage in any retail store is much prevalent and eradicating it completely is not possible. Only constant monitoring can be carried out and lower the rate.  Mr Sivakumar says, “Sometimes, shrinkage may be as high as 15 per cent to 20 per cent of total volume, resulting in major negative impact on profits. The average shrink percentage in the retail industry is about two per cent of sales.” On the other hand, Mr Dharmesh Lamba, Country Manager, Checkpoint Systems, Inc., informs, “The rate of retail shrinkage in India is estimated at 2.9 per cent according to a survey study conducted by the global theft retail barometer whereas it is 1.8 per cent internationally.” Retail theft affects everyone and so, it is not a concern reserved for just retailers. Ultimately, consumers suffer most in the form of higher prices.

 

Types of frauds

Since employees know the business processes very well, they tend to become more audacious. This leads to employee frauds ranging across a wide number of activities. Unfortunately, this is one ‘loss prevention area’ that generally doesn't receive as much monitoring as in the case of customer theft. The holiday shopping season is full of activities and very important time for many retailers. It is also an extremely busy time, which leaves stores more vulnerable to theft. Some the most common types of employee frauds are:

·        Sweet heartening

The most common method of employee theft is ‘sweet heartening’. It is a practice where an employee lets a ‘sweet heart’ friend walk away with some high-value items after paying for cheaper products.

·        Credit card abuse

Credit card fraud is using an invalid or stolen credit card for personal use. It is basically the use of a credit card in a dishonest way for the purchase of certain commodities.

·        Breach of confidentiality and conspiracy and data security breaches

An employee reports that he has seen another employee print some confidential customer data and place it in his bag. Investigation reveals the employee had been offered money for providing confidential information of the store.

·        Cashier fraud

This fraud includes misappropriation of funds of the sales in stores. The cashier may steal money from the cash box while managing sales. Other activities interlinked with this are cutting manual bills, which are not recorded, discount abuse and refund abuse.

·        Identity fraud and impersonation

Employee fraud featured together with identity fraud is also on the rise. Some dishonest employees steal customer data to enable identity frauds to take place. The person whose identity is used can suffer from various consequences when they are held responsible for the perpetrator's actions.

Other employee frauds include theft of cheques, forging signatures and falsifying documents. About types of employee frauds, Mr Sivakumar says, “Employee frauds include activities like inventory theft, misappropriation of cash or assets, cheque forgery, falsification of expense claims, ghost vendors, diversion of sales, unnecessary purchases, impersonation, falsifying documents, selling company assets below true value in return for kickbacks, misuse of company assets, payroll fraud and procurement fraud. “

 

Fraud indicators

Retail stores are becoming increasingly aware of the grave problem of employee theft. There are some conditions that give the retailer a sign that something fishy is going on. These are known as fraud indicators or warning signs. Anything unusual can be noticed when the staff member is under stress without a high workload, sudden change of lifestyle, new staff resigning quickly, unexplained wealth or living beyond apparent means, always working late, customer complaints of missing statements, unrecognised transactions, reluctance to take leave, suppliers who insist on dealing with just one individual, cosy relationships with suppliers, employees with external business interests and marked changes in the personality of the employees.

The high attrition rate in the retail industry is one of the biggest reasons for internal theft. As employees quit within a very short time (less than six months), they do not have any sense of belonging or empathy with their employers or the store. So, this leads them to steal or let their friends do the same. Mr Sivakumar says, “It is generally accepted that frauds are committed (by individuals) when the following three conditions co-exist: a) The individual must have an incentive to commit fraud, b) he must identify an opportunity to commit fraud and c) he must be able to rationalise the reason for committing fraud. Criminological research indicates that most of the fraudsters tend to be risk-takers, decisive, extroverted, career or success-oriented individuals. Paradoxically, these traits are those that are also highly prized in management recruitment.”

Other factors may include dissatisfaction from work, hunger for money and inclination towards luxurious lifestyles. PricewaterhouseCoopers Global Economic Crime Survey 2007, India, shows that individual incentives for employee fraud include: Financial incentives/greed (64 per cent), low commitment (35 per cent), career disappointment (25 per cent), expensive lifestyle (22 per cent) and denial of financial rewards (15 per cent). Opportunities for employee frauds include: Insufficient controls (46 per cent), external collaboration (36 per cent), management over-ride (35 per cent), increased staff anonymity (32 per cent), internal collaboration (23 per cent) and unclear corporate values or ethics (20 per cent).  Some of the self-rationalisations for fraud include: Lacking awareness of wrongdoing (56 per cent) and fraudsters’ low temptation threshold (35 per cent).


Theft curbing procedures

Employee theft cannot be eradicated completely. It can only reduced by checking and monitoring. Various software solution firms are working on developing techniques that can help retailers tackle the problem of employee theft. Technology alone will not eliminate retail theft. So, retailers who want to reduce losses should also strive to provide and promote high job satisfaction levels among their retail sales associates. But, before employing the staff, employee recruitment checks and controls must be ensured to have carried out with due care. In some organisations, lack of employee recruitment checks and controls is the source of employee fraud problem. Checks integrate confirmation of previous employment details, confirmation of all qualifications, confirmation of identity and credit reference agency checks. Nowadays, retailers are also training their employees to increase their emotional attachment and ownership with the store. They share the secret information about the stores to make them feel they are the owners of their counter. The idea is to create a sense of belongingness. Also, rewarding staffs and creating a loyal work force help retailers not only in reducing fraud but also in certain other ways. So, giving financial incentives and rewarding positive behaviour are quite helpful for the retail store in reducing frauds. This explains why one of the first steps retail consultants recommend is creating an organisation culture that fights loss. Agreeing that companies must move forward in developing fraud control programmes and strategies, Mr Sivakumar says, “Corporate culture is vital to establishing an effective fraud risk management programme. Replacing one-off risk mitigation programmes with comprehensive compliance programmes that are fully integrated into all components of business operations, pro-actively monitoring vulnerabilities to fraud and developing a strong ethical culture that is clearly evident to all employees can be accomplished through setting the right ‘tone at the top’."

Technologies such as anti-shoplifting systems, digital video surveillance, point of sale monitoring solutions, installing RFID systems, sensors, IT solutions integrated with remote and central station monitoring are very useful for controlling the problem. Mr Lamba, says, “Checkpoint has come up with the latest RF technology for Evolve, which includes increased system performance, enhanced system integrity, enriched data connectivity, investment protection design, efficient cost of ownership, full system connectivity and aesthetically pleasing designs through Slimline. The benefits of having Evolve are higher accuracy, fewer missed items, ability to protect smaller items, broader coverage with fewer pedestals and more open space for customer merchandising. All these benefits add the incentive for reducing shrinkage further.” Point-of-sale data mining software solutions detect potential theft problems at the cash register and alert appropriate personnel in real-time. These data mining packages can be tied to digital video recorders to provide crisp, clear images of ‘who sold what to whom’ at the click of a button and can be delivered to any location around the world. Self-alarming anti-theft tags broadcast an audible alarm throughout the store when someone attempts to improperly remove it from merchandise. Mr Lamba says further, “Reliance, Pantaloons, Aditya Birla Group, Koutons Retail, Lilliput are just some of retailers with whom checkpoint is associated in India. We do not just install the systems but also educate retailers about the proper utilisation of the products. We provide these products to retail stores thereby controlling shrinkage and providing solutions designed for a wide rang of merchandise.”

Constant vigilance is a tactic that all the retailers need adopt at every moment to tackle the theft.  Also, daily checks on high valued items and regular checks on the not too high valued products is a must. The benefit of daily checks is that if an item goes missing, instant action can be taken. Instead of displaying items in a rather concealing way, they should be displayed prominently so that they are visible to all and missing is noticeable instantly. Large signage that mentions that the store is under electronic surveillance is also important. A display screen in the store that screens the movement of people should be put up; the perception that ‘you are constantly monitored’ will make the employees hesitant about stealing. There should be no dead corners in the store and there should be plenty of open, well-lit spaces and wide aisles to ensure high visibility. Some stores also have security men walking through the store at different intervals, constantly monitoring activities. Along with this, they have also adopted the technique of mystery shopping where mystery shoppers visit the outlets looking out for suspicious behaviour from employees. Most retailers dismiss dishonest employees immediately. Recently, some retailers have adopted a zero-tolerance policy whereby they initiate criminal proceedings against erring employees. All these techniques will definitely help retailers contain some percentage of their losses.

It used to be unusual to make a connection between employee frauds and organised crime. But, increasingly, the links are becoming evident. Some of the money from employee fraud is assumed to be finding its way to fund terrorism, drugs and other organised crime. Therefore, retailers should work on this aspect and try to reduce shrinkage and increase the levels of profits for their firms.

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