Rising employee theft wringing out more profits

Nation's Restaurant News, July 28, 1997 by Fred D. Miller

Employee theft is on the rise to the tune of $40 billion a year, and there is no reason to believe that foodservice is a less-likely target than any other industry. In fact, it may be even more susceptible. While most employees are honest, hardworking and loyal, some are not and will find opportunities to exploit their employers by stealing. And employers who controls are those who probably will find that costs exceed their profits and will go out of business.

The true reasons why employees steal are as diverse as the employees themselves, but rarely is theft grounded in true economic need. In other words, employees stealing for self-preservation are not all that common these days. My own experience has shown that insecurity about jobs, substance abuse, living above one's means and simple greed are the primary motivators. Foodservice operations are an easy target because they are typically cash-intensive, have high rates of labor turnover, fewer or inexperienced supervisors and, most significant, deal in a commodity that has high street value and is not readily traceable: food!

What is as disconcerting as the $40 billion figure itself is the number of businesses that fail to recognize the very real price they pay for theft or their failure to find ways of neutralizing and preventing this costly problem. To illustrate this point, consider that for every $1,000 lost through employee theft, a whopping $16,666 in additional sales needs to be generated just to make up for the loss. In essence, it's like working against yourself just to break even. The question is, How do we control employee theft without the cure costing more than the losses?

One very effective method is by developing systems and procedures that treat security problems in the same fashion as other management issues: through analysis, planning and implementation of controls.

Failed controls lead to theft: Why and how employee theft occurs is no mystery albeit some scenarios are very elementary, like pocketing money generated from bogus petty cash receipts, while others involve more sophisticated planning and methods like collusion with a vendor and other fraud schemes. Yet all losses share two elements in common: failed or deficient controls and and an exposure or loophole that was either not addressed or identified too late by management.

One such control I frequently see breached in cash operations is the failure to compare validated deposit slips with actual deposits or sales. In one case an employee was able to defraud a restaurant of more than 10 thousand dollars over the course of as many months by substituting hand-stamped receipts for validated deposit tickets. As that employee was also responsible for the monthly deposit reconciliation and sales reporting, the deception continued until the bank notified management of an overdrawn account. Management failed to allocate accounting controls to two or more people, which in this case was the key element in the embezzlement.

Problem areas: Although many losses are attributable to outright employee theft, the real problem may be in the record-keeping system. It is here that I have frequently discovered that if more accurate records had been kept, the loss might not have occurred at all. The loss prevention process must include reviewing procedures and the accompanying accounting controls on a regular basis.

Take, for instance, the cashier who deliberately would uner-ring sales, creating cash overages, "banking the drawer." As routine spot audits were not performed at the point of sale, the overages were never detected or tracked. At the end of the register shift the cashier would simply wipe out the "banked" sales and the register would balance even.

Identifying loss exposures: To determine exposures, it is necessary to conduct a thorough review of all procedures as the basis for identifying weak areas and instituting controls. Typically, the review or analysis will be divided between physical security issues and operating and procedural matters but usually without equal emphasis. It should concentrate on the functions that represent a high degree of vulnerability or risk and those with a prior loss history. Assume, for instance, that your review is to include inventory controls form the point of receiving through storage and production. Your analysis should include:

* establishment of physical barriers aimed at restricting employee and nonemployee access to inventory storage.

* segregation of accounting responsibilities for inventory control and utilization.

* controlling the movement of inventory from receiving to storage through utilization.

* accountability for returns, salvage and damaged materials

* providing partitioned areas for higher value inventory or materials

* lock and key control

Security awareness and employee buy-in: Security awareness is perhaps one of the most effective methods in dealing with employee theft. Its value is in getting employees to recognize the impact the dishonesty of their co-workers has on the majority, in terms of lost company profits, wages and benefits and so on, and in obtaining their support for controls. Security awareness rarely is promoted from the outside. I've never seen billboards advertising "thou shalt not steal from thy employer" although some anti-shoplifting campaigns have gone public. It is an internal campaign.