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Retail store managers often think that they are doing a great job
of reducing the risk of theft and fraud if the have security devices at
the entrance to the store to detect merchandise theft, secret shoppers
to observe customers, and security cameras providing constant
surveillance or at least theft deterrence of the floor. 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 the assistant manager for one of the stores in a national retail drug store chain. He and the manager had noticed an unusual change in the relationship between sales and inventory cost and a higher than expected increase in the inventory shrinkage (theft) numbers. He asked me if I could stop by the store to visit with him and the manager about their observations. I left home early, stooped at the coffee shop for a cup of Joe and pulled into the parking lot about 30 minutes before the store was to open. I was surprised to see customers entering and leaving the store so I walked in and bought a newspaper. An assistant manager was running the till and I mentioned that I was surprised to find the store open so early. He explained that corporate had changed operating hours but that they hadn't 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 spoke for a few minutes in the parking lot and then went out back to look in the dumpster. There, right on top, we found the morning's till tape. The other assistant manager had been opening the store a full hour early, making sales for an hour, pocketing the cash, disposing of the till tape at the official opening time and starting a new till. This had been going on for about three months, ever since the assistant manager had offered to open the store every day to, "give the manager a hand". The loss over the three-month period totaled about $13,000. Not a bad three-month bonus for "helping out" the manager.
The most common employee frauds that I have observed include the following:
- Register training mode fraud,
- Under-ring, up-charge fraud,
- Fraudulent refunds,
- Coupon/discount fraud,
- Sales cancellation fraud, and
- Price adjustment fraud.
Register Training Mode Fraud - Many cash registers have a training mode. This lets a manager train a new employee without the transactions being recorded as actual sales. The cash register functions normally, the customer display works appropriately. However the sales are not recorded. A manager who placed a cash register in training mode would be able to walk off with thousands of dollars of unrecorded sales every day. The manager wouldn't even have to run the till, that could be left to another unsuspecting employee.
Under-ring, Up-charge Fraud - This fraud occurs when an employee fails to ring up all of the items or overcharges a customer. The employee pockets the difference between the amount paid by the customer and the under-recorded amount. While this is the easiest fraud to commit and the hardest for managers to detect, it can also be detected by customers who pay careful attention to the customer display on the cash register.
Fraudulent Refunds - Cash theft can be covered up with refund slips. An employee who has stolen from the till prepares refund slips to cover the cash taken. This fraud is easy to prevent if all refunds have to support by signed customer receipts or if the refund slip 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. A cashier, rather than using refund slips to cover the theft of cash, rings up excessive coupons or discounts. Most point-of-sale systems have discount keys for discounts, coupons, special sales, and promotions. A review of the till tape with an eye towards unusually low sales activity and higher than expected discount activity will usually detect this problem.
Sales Cancellation Fraud - Most sales registers are equipped with a cancellation button that lets the cashier cancel an item from a sale without voiding the entire sale. Cashiers can use this feature to steal when customers pay the full amount for a sale and receive appropriate change after items have been canceled. The cashier pockets the difference. A high number of item cancellations on a till tape coupled with lower than average total sales may indicate this type of fraud.
Price Adjustment Fraud - The price of an item in the accounting system should be the same as the price of the same item as computed by 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 lower the price in the accounting system and then pocket the difference between till revenue and revenue as recorded in the accounting system. A similar fraud can be perpetrated if a manager is able to 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 every month before sales taxes are paid to the state. While 0.1 percent doesn't' seem like much, and most customers wouldn't even notice it, it can about to a substantial amount of money over a year. Assume that an average sales is only $50, and that 1,000 sales take place per day. Over the course of a year the fractional overcharge would amount to about $18,000 per year.
Detecting Retail Employee Fraud
The following are common red flags that retail managers need to be aware of. While the presence of one or more red flags doesn't prove fraud, it should cause concern and result in additional investigations. The red flags that I use are:
- Increasing inventory cost with decreasing sales activity
- Lower than average sales per cashier
- Increasing costs without a corresponding increase in sales
- Lower transaction counts per cashier
- Increasing personnel costs (payroll) with constant or decreasing sales
- Missing documentation to support refunds and returns.
Techniques that can be used to prevent retail fraud include:
- Frequent audits of register activity
- The use of accepted activity ranges (sales, number of transactions, number of refunds, number of cancellations, refund and cancellation amounts) coupled with exception reports that identify activity outside the expected ranges.
- The use of well designed procedures for cashiers and cash handling.
- Proper training and supervision of cashiers 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 supervisory controls and procedures to both reduce the risk of fraud and to detect its occurrence.
Years ago my younger brother was the assistant manager for one of the stores in a national retail drug store chain. He and the manager had noticed an unusual change in the relationship between sales and inventory cost and a higher than expected increase in the inventory shrinkage (theft) numbers. He asked me if I could stop by the store to visit with him and the manager about their observations. I left home early, stooped at the coffee shop for a cup of Joe and pulled into the parking lot about 30 minutes before the store was to open. I was surprised to see customers entering and leaving the store so I walked in and bought a newspaper. An assistant manager was running the till and I mentioned that I was surprised to find the store open so early. He explained that corporate had changed operating hours but that they hadn't 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 spoke for a few minutes in the parking lot and then went out back to look in the dumpster. There, right on top, we found the morning's till tape. The other assistant manager had been opening the store a full hour early, making sales for an hour, pocketing the cash, disposing of the till tape at the official opening time and starting a new till. This had been going on for about three months, ever since the assistant manager had offered to open the store every day to, "give the manager a hand". The loss over the three-month period totaled about $13,000. Not a bad three-month bonus for "helping out" the manager.
The most common employee frauds that I have observed include the following:
- Register training mode fraud,
- Under-ring, up-charge fraud,
- Fraudulent refunds,
- Coupon/discount fraud,
- Sales cancellation fraud, and
- Price adjustment fraud.
Register Training Mode Fraud - Many cash registers have a training mode. This lets a manager train a new employee without the transactions being recorded as actual sales. The cash register functions normally, the customer display works appropriately. However the sales are not recorded. A manager who placed a cash register in training mode would be able to walk off with thousands of dollars of unrecorded sales every day. The manager wouldn't even have to run the till, that could be left to another unsuspecting employee.
Under-ring, Up-charge Fraud - This fraud occurs when an employee fails to ring up all of the items or overcharges a customer. The employee pockets the difference between the amount paid by the customer and the under-recorded amount. While this is the easiest fraud to commit and the hardest for managers to detect, it can also be detected by customers who pay careful attention to the customer display on the cash register.
Fraudulent Refunds - Cash theft can be covered up with refund slips. An employee who has stolen from the till prepares refund slips to cover the cash taken. This fraud is easy to prevent if all refunds have to support by signed customer receipts or if the refund slip 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. A cashier, rather than using refund slips to cover the theft of cash, rings up excessive coupons or discounts. Most point-of-sale systems have discount keys for discounts, coupons, special sales, and promotions. A review of the till tape with an eye towards unusually low sales activity and higher than expected discount activity will usually detect this problem.
Sales Cancellation Fraud - Most sales registers are equipped with a cancellation button that lets the cashier cancel an item from a sale without voiding the entire sale. Cashiers can use this feature to steal when customers pay the full amount for a sale and receive appropriate change after items have been canceled. The cashier pockets the difference. A high number of item cancellations on a till tape coupled with lower than average total sales may indicate this type of fraud.
Price Adjustment Fraud - The price of an item in the accounting system should be the same as the price of the same item as computed by 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 lower the price in the accounting system and then pocket the difference between till revenue and revenue as recorded in the accounting system. A similar fraud can be perpetrated if a manager is able to 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 every month before sales taxes are paid to the state. While 0.1 percent doesn't' seem like much, and most customers wouldn't even notice it, it can about to a substantial amount of money over a year. Assume that an average sales is only $50, and that 1,000 sales take place per day. Over the course of a year the fractional overcharge would amount to about $18,000 per year.
Detecting Retail Employee Fraud
The following are common red flags that retail managers need to be aware of. While the presence of one or more red flags doesn't prove fraud, it should cause concern and result in additional investigations. The red flags that I use are:
- Increasing inventory cost with decreasing sales activity
- Lower than average sales per cashier
- Increasing costs without a corresponding increase in sales
- Lower transaction counts per cashier
- Increasing personnel costs (payroll) with constant or decreasing sales
- Missing documentation to support refunds and returns.
Techniques that can be used to prevent retail fraud include:
- Frequent audits of register activity
- The use of accepted activity ranges (sales, number of transactions, number of refunds, number of cancellations, refund and cancellation amounts) coupled with exception reports that identify activity outside the expected ranges.
- The use of well designed procedures for cashiers and cash handling.
- Proper training and supervision of cashiers 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 supervisory controls and procedures to both reduce the risk of fraud and to detect its occurrence.
David Murphy, CFS, CPA, PhD. is Professor and Chair of the
Accounting and Economic Crime Investigation departments at Lynchburg
College in Virginia and a member of the Board of Regents of the
Association of Certified Fraud Specialists. He has been involved in
training public sector fraud investigators throughout the world for the
past ten years. He can be contacted through his web site at http://www.DSMurphyCPA.com.
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