Be Proactive With Employee Fraud


Time and time again, I am contacted by frantic franchisees who have just been through an audit that resulted in the disclosure of either a cash or inventory shortage. Small shortages, particularly of inventory, are expected in a convenience store, like a 7-Eleven, that has an inventory of thousands of small items that attract shoplifters. But the shortages that prompt the calls to me are often counted in the tens of thousands of dollars and cannot be attributable to normal and expected pilferage.

Often, these shortages bring a franchisee’s net worth far below minimum, and sometimes far below zero. In many cases, the shortages are too large to be covered by the resources of a storeowner. The result: either immediate termination or, for more fortunate owners, the opportunity to enter into a good will sale. In either event, it is like getting hit by a truck or train, and the storeowner no longer has a business from which he can support his or her family.

Here is what I find astounding about those events. In the vast majority of cases that come to my attention, the obvious and proven cause of the shortages is employee fraud, i.e. stealing. Interestingly, the thief is typically not the new clerk or even your younger employees. More often than not, the culprit is a trusted manager or even a close relative (child, brother, nephew, uncle), in whom you feel comfortable placing in their hands your most valuable possession—and typically your one or more stores are greatly your most valuable possession.

Here is the time-honored formula to predict employee fraud: OPPORTUNITY + NEED = THEFT.

“Need” can be a problem for all relatively low paid employees, and beyond a franchisee’s control. “Opportunity,” on the other hand, can be subject to control, but the enemy is complacency and sometimes just plain inattention to this part of your business because you are too busy with the day-to-day tasks of running a 7-Eleven store. You simply cannot understand how a long-time and trusted employee can rip you off. BIG, BIG MISTAKE.

Back in the 1980s, at the end of the Cold War when President Regan forged a treaty with the Soviet Union for nuclear disarmament, he knew he couldn’t fully trust the Soviets, so he made sure that the United States was able to ensure compliance with the treaty. He coined the phrase: TRUST BUT VERIFY. What the President was saying is that he could not take any chances with the security of America. That motto should become your mantra when it comes to employee theft.

According to New York forensic accountants Israeloff, Trattner & Co., 85 percent of asset misappropriation cases involve theft or misuse of cash, with cash register theft typically not detected for more than 12 months. Retailers like you are just as likely, or more likely, to be victimized by employee theft of merchandise.

As an example, an employee can easily pocket $50 or more daily by not ringing up a few sales. It doesn’t take much. Once in the habit, and knowing that he can and does get away with it, the habit is hard to break or becomes part of that employee’s regular income. Similarly, and as only one example, an employee who smokes can steal a pack or two a day for himself or a friend, and without detection—unless you make detection a priority.

Here are some things you can do. First and foremost is to institute a system of checks and balances. Don’t give any employee sole authority over the registers or inventory in the store. More than one employee should be able to prepare cash and merchandise reports and deposits. All of you have several cameras in the store that can and do capture cash or inventory theft. The problem is that you can’t or won’t spend the time to at least periodically, and without any warning to your employees, check the videos. Even worse, the job is sometimes left to the very employee/manager who may be the thief. What a sweet deal he thinks he has. This is akin to letting the fox into the hen house. You can be sure this fox will eat the chicken.

Some things to protect yourself:
1. Don’t let any employee, long term or short term, young or old, even close relatives, check the videos for employee theft of cash or merchandise. That is your job or should be performed by a non-employee. Never let employees know when you or a non-employee will be viewing the videos and don’t do it on a set schedule, i.e. every Thursday at 9:00 a.m.
2. Establish and make clear to employees that there is zero tolerance when an employee is caught stealing, and that he or she will be fired immediately—no second chances. This will also put the fear of G-d in your other employees.
3. When employee theft is first discovered, you can be sure it is the tip of the iceberg. Act fast. The longer the fraud continues, the bolder the employee gets and the more expensive for you it becomes.
4. Set up a “tip line” with your employees in which they are advised that any information that is provided to you about a co-employee’s theft will be kept strictly confidential and will be monetarily rewarded.
5. Last, and certainly not least, try not to have a set daily schedule when you arrive at the store and when you leave it. This scenario provides employees with the “window of opportunity” in which they feel they can act with impunity. To the extent possible, don’t let employees know your expected hours in the store on a particular day, and if you leave the store temporarily, don’t give employees the time that you expect to return. Surprise and unannounced visits are important. Always keep employees on edge so that can never know when it is “safe to steal.”

So remember, running a 7-Eleven store is essentially a Mom and Pop operation. There is no hierarchy of executives to share responsibilities. You do it all. Don’t put the survival of your business in the hands of employees. When it comes to employee theft, “business as usual” is not an option.