Retail store managers often think they are doing a great job reducing the risk of theft and fraud if they have security devices at the store entrance to detect theft of merchandise, secret shoppers to observe customers, and security cameras. security that provide constant surveillance or less deterrence of theft of the apartment. Unfortunately, these managers are looking the wrong way. Most retail fraud and theft doesn’t originate with customers, but with employees.
Years ago, my younger brother was an assistant manager of one of the stores for a nationwide retail pharmacy chain. He and the manager had noticed an unusual change in the relationship between sales and inventory cost and a greater than expected increase in inventory shrinkage (theft) numbers. He asked if I could stop by the store to speak with him and the manager about his observations. I left home early, stopped at the cafeteria for a cup of Joe, and pulled into the parking lot about 30 minutes before the store opened. I was surprised to see customers come in and out of the store, so I went in and bought a newspaper. An assistant manager was in charge of the checkout and I mentioned that I was surprised to find the store open so early. He explained that the company had changed the hours of operation, but that they had not received the new signs for the front door. I thanked him for the great service and went back to my car to wait.
When my brother, the other assistant manager, and the store manager arrived, we talked for a few minutes in the parking lot and then went out to search the dumpster. There, right at the top, we find the tape from the morning cash register. The other assistant manager had been opening the store an hour earlier, making sales for an hour, saving the cash, discarding the tape from the box at the official opening time, and starting a new box. This had been going on for about three months, ever since the assistant manager had offered to open the store every day to “help the manager out.” The loss over the three-month period amounted to about $ 13,000. Not a bad three month bonus for “helping” the manager.
The most common employee scams that I have observed include the following:
– Record fraud in training mode,
– Outsourced fraud and with additional charge,
– Fraudulent refunds,
– Coupon / discount fraud,
– Sales cancellation fraud, and
– Price adjustment fraud.
Fraud log in training mode – Many cash registers have a training mode. This allows a manager to train a new employee without the transactions being recorded as actual sales. The cash register works normally, the customer screen works correctly. However, sales are not recorded. A manager who put a cash register in training mode could walk away with thousands of dollars of unrecorded sales every day. The manager wouldn’t even have to run the checkout, that could be left to another unsuspecting employee.
Undercharged and Chargeable Fraud – This fraud occurs when an employee fails to register all items or overcharges a customer. The employee pockets the difference between the amount paid by the customer and the unrecorded amount. While this is the easiest fraud to commit and the hardest for managers to spot, it can also be spotted by customers who pay close attention to the customer’s screen at the cash register.
Fraudulent Refunds: Cash theft can be covered with refund slips. An employee who has stolen from the cash register prepares refund slips to cover the cash taken. This fraud is easy to prevent if all refunds must be supported by receipts signed by the customer or if the refund voucher must be signed by both the cashier and a manager at the time of the refund.
Coupon / Discount Fraud – Coupon / Discount Fraud is similar to Fraudulent Refunds. Instead of using refund vouchers to cover cash theft, an ATM generates excessive coupons or discounts. Most point of sale systems have discount keys for discounts, coupons, special sales, and promotions. A checkout tape review for unusually low sales activity and higher-than-expected discount activity will generally detect this problem.
Sales Cancellation Fraud – Most sales records are equipped with a cancel button that allows the cashier to cancel an item from a sale without voiding the entire sale. Cashiers can use this feature to steal when customers pay the full amount of a sale and receive the corresponding change after the items have been canceled. The cashier keeps the difference. A large number of cancellations of items on a checkout tape along with below-average total sales can indicate this type of fraud.
Price adjustment fraud: The price of an item in the accounting system must be the same as the price of the same item calculated by the cash registers. However, unless the point of sale system is integrated with the accounting system, a manager with access to the accounting system and knowledge of how to change prices could reduce the price in the accounting system and then pocket the difference between cash receipts and receipts as recorded in the accounting system. Similar fraud can be committed if a manager can adjust the sales tax rate by a fraction of a percentage. For example, if the sales tax rate is 7.5 percent and the manager codes the system to charge 7.6 percent, the additional 0.1 percent could be skimmed each month before they are paid. sales taxes to the state. While 0.1 percent doesn’t sound like a lot, and most customers wouldn’t even notice it, it can come up to a substantial amount of money over a year. Assume that an average sales is only $ 50 and that 1,000 sales are made per day. Over the course of a year, the fractional surcharge would amount to approximately $ 18,000 per year.
Retail Employee Fraud Detection
The following are common red flags for retail managers to be aware of. While the presence of one or more red flags does not prove fraud, it should cause concern and lead to further investigation. The red flags that I use are:
– Increase in inventory cost with decrease in sales activity.
– Sales per cashier below average
– Increasing costs without a corresponding increase in sales.
– Lower transaction counts per teller
– Increasing personnel costs (payroll) with constant or decreasing sales
– Lack of documentation to support refunds and returns.
Techniques that can be used to prevent retail fraud include:
– Frequent audits of registry activity.
– The use of accepted activity ranges (sales, number of transactions, number of refunds, number of cancellations, refund and cancellation amounts) along with exception reports that identify activity outside the expected ranges.
– The use of well-designed procedures for tellers and cash handling.
– Adequate training and supervision of tellers to ensure compliance with established policies and procedures.
Fraud and occupational abuse by employees should not be accepted as a normal cost of doing business. Retail managers must be aware of the fraud methods used by employees and then design monitoring controls and procedures both to reduce the risk of fraud and to detect its occurrence.
