Are your employees stealing from you?

February 5, 2016 Ryan Perrone No comments exist

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Are your employees stealing from you?

 

You might find that question preposterous, but even so, do you truly know the answer, or feel 100% certain in answering it? Odds are, most people think the answer is no, and hopefully, they’re right. If you think it’s yes, you either have proof, or you might doing something about it.

 

In the retail industry alone, employee theft accounted for $18 billion, or 43% of inventory shrink in the prior year. However, employee theft can occur in any industry, I know, I’ve seen or heard about it firsthand. Below are just some of the examples I know of:

  • A meat processing facility was acquired by a client, the operation always had low margins and was a pretty cheap acquisition. It was sold by a large food processing company, who divested of it for less than 20% of the $150 million it had paid years ago for the operation. It turns out, there was very good reason for the low margins. A truck would leave the plant every night with meat that was sold on the black market. There was collusion among the employees and the security. As an added bonus to the story, that wasn’t the only thing that was not up to par. The facility was not located in a good neighborhood, so it was surrounded by fencing. There was a high school across the street, and the company’s security would let high school students park their bikes inside the gated area across from the school. The kids were dealing drugs for the security guard, which is why he let them park their bikes inside the gated area.
  • A manufacturer, which used specialized tools, noticed that its costs kept going up, at an even higher rate than production demands. These tools costed anywhere from $50 – $300 each, weighed less than 5 pounds, and some were even carbide-tipped. On a hunch, an owner checked with local scrap yards and found out that they were showing up there as scrap metal. So these parts were being stolen and sold for less than $1 in scrap per item. New procedures and surveillance equipment managed to stem the outflow.
  • A lumber supplier that was facing financial troubles had consistent inventory problems. The main reason had to do with the occasional trucks that would get loaded with product during the evening shift when there was a skeleton crew. Someone found this out by parking outside the facility at night on a stake-out to see if anything seemed unusual.
  • Service businesses are also not immune. In a small professional service organization, the controller was stealing from the company. He ran payments through expense reimbursement into direct deposits accounts for him and his family, this showed up to him as non-taxable payments. He plugged the journal entry into payroll, which was the company’s biggest expense. The whole thing was unraveled by the receptionist, of all people. One day he called to say he was missed his train and would be late to work, but the caller ID showed his home number. Having heard enough lies, she insisted they dig deeper. As they went through his office, they found a book on how to commit identity fraud, and this individual had access to everyone’s social security numbers. I’ll add to the story when I talk about white collar crime later.

The examples above are some of the more unsophisticated instances. The best one I heard of involved a collusion between accounting, purchasing and a vendor to create false documents. The “official” documents were for office supplies, but the company was actually paying for iPods and other electronics that were popular to sell on eBay. If you’ve ever seen a new item being sold for less than market price, it may be a legitimate item, however, its origins are probably suspect.

 

Preventing theft requires a lot of different pieces to be in place. The most obvious is to screen employees, it’s best not to hire a thief in the first place. That being said, the following factors can also contribute:

  • Good controls to account for the flow of goods and how they enter and leave the premises.

  • 2nd and 3rd shifts can provide more opportunities with less people around and lower supervision.

  • In smaller firms, some people handle multiple tasks and have less oversight.

Years ago, I read an interview with a member of the mafia. One quote really stuck with me because it was a very unique viewpoint:

 

“Opportunity presents the thief, the thief that has no opportunity to steal calls himself an honest man.”

 

This is a pretty dark view of humanity, but I think the lesson to take away from this is: think like a thief, and then limit the opportunities to steal.

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