Taking the Store: A Loss Prevention Perspective

In this column, Christopher Shell, an internal auditor, describes his experiences in the loss prevention area. He shows that inventory misappropriation in the retail industry is a difficult and challenging fraud environment to investigate. Shell is in the master’s of accounting program at the University of Alabama at Birmingham.

FRAUD AND LOSS PREVENTION 

Inventory shrinkage is the difference between a company’s adjusted book inventory level and the physical amount of inventory. The four main components of inventory shrinkage are employee theft, shoplifting, clerical errors, and vendor fraud. According to the University of Florida’s 2004 National Retail Security Survey, employee theft accounted for $17.6 billion, or 47 percent, of the year’s total inventory loss. This astounding figure is an unnecessary expense that directly impacts store profitability.

During the fraud examination course at the University of Alabama at Birmingham, I learned ways to prevent and detect various fraud schemes. The course work gave me relevant training for my current internal auditor position and increased my understanding of the services I provided when I was a loss prevention (LP) associate for a large retailer during my undergraduate studies.

Following are two short cases that illustrate the low-risk, high-reward mind-set of experienced fraudsters. The cases should bring to mind the fraud triangle and the importance of internal controls.

Runaway lawnmower 

My first occupational fraud experience came within my first couple of weeks as an LP associate. Because staff scheduling conflicts arose, I was left alone to monitor, through closed-circuit TV (CCTV), the activities of a lawn-and-garden sales associate. (I’ll call him Burt.) Earlier, a senior LP associate, while reviewing weekly employee discount and void reports, had discovered several red flags flying around Burt. I struggled to stay focused on Burt the entire day; I felt like I was wasting company time and resources observing this friendly, well-dressed, and trusted employee completing normal business transactions.

But about halfway through the day, I had about two minutes of excitement. A customer approached the register with an assembled, walk-behind lawnmower. The customer was about the same age as Burt and their body language led me to believe they might be acquaintances. I watched through CCTV as Burt scanned and keyed information into the register, swiped the customer’s credit card, and printed the receipt. After Burt handed him the receipt, the customer pushed the lawnmower out of the store and loaded it into a pickup truck.

The senior LP associate investigating this employee asked me the next day if anything unusual had happened during the previous day’s surveillance. I told him her I hadn’t seen anything, but I did replay the lawnmower transaction videotape because it was the only remotely interesting event of the day. After analyzing the tape, it became apparent to both of us that Burt had simply pretended to scan the UPC label on the lawnmower and never initiated an actual sales transaction. Burt had swiped the customer’s credit card through the register, but only for show because there was no sale requiring the card information. To finish off the fictitious sale, the employee manipulated the register to print two blank receipts. The customer signed and returned one of the blank receipts and put the other in his wallet.

ACFE literature points out that to prove a fraud has happened, you need to try to prove it didn’t happen – the axiom of reverse proof. To ensure a sale didn’t take place, we pulled all transactions on that register for the day. The electronic register journal indicated the fraudulent lawnmower “sale” was never recorded. Although I had no idea what I was doing at the time, the video evidence proved to be more than sufficient to terminate and prosecute Burt. When asked for the reasons for perpetrating the fraud, he said he was trying to find ways to make his job more rewarding!

‘Dirty’ cleaner 

Normal store hours were 9 a.m. to 9:30 p.m. at the large retail store at which I worked. A cleaning crew worked in the store from 6 a.m. to 10 a.m. Loss prevention associates were always present in the store, but only one LP associate was on duty before the store opened. This associate typically stood at the exit door to verify incoming vendor shipments and outgoing local deliveries to customers; he wasn’t able to monitor employee activity within the store.

Every person on the cleaning crew had developed the trust of other employees and management because they had serviced the company for years. The main control preventing the cleaning personnel from taking merchandise from the store was the process of another LP associate checking all personal belongings (lunch boxes, shopping bags, etc.) as they left the store after their shifts.

The LP associate who opened the store would walk the sales floor each morning to look for anything unusual. This associate started finding empty packaging and clothing tags in fitting rooms and other areas. I joined that LP one morning to monitor the cleaning personnel more closely.

One day, something unusual happened. A member of the cleaning crew (I’ll call her Betty) picked up an expensive silverware set and placed it in an area about 20 feet away. Betty’s actions seemed deliberate, but I couldn’t figure out why someone would move inventory from one place to another. A few minutes later at the end of her shift, Betty gathered her belongings and left the store. Still perplexed, I walked out to the sales floor to take a look at the merchandise she had moved. Once at the location, I realized she had moved the silverware from a spot that was highly visible by the CCTV cameras to a spot with little visibility. I returned to the LP office and began to record the best available CCTV shot of the silverware set. Approximately an hour after she left the store, Betty reentered the store and went straight to the home goods section. She purchased a jumbo-size pillow at the closest cash register so she could obtain a big shopping bag. Betty then walked to the aisle containing the silverware, slipped the silverware set into her shopping bag, and left the store without attempting to pay for the merchandise. The cleaning associate was apprehended and later terminated and prosecuted.

Betty was having financial problems and was selling stolen inventory to make extra cash. The day before this incident, she had asked the store manager for a loan, saying that she had lost her checkbook and someone had cleaned out her checking account. Store associates admired this sweet lady and she was the last person you would think would steal from the company.

In both of these cases, the company was able to identify red flags that initiated an investigation. However, the frauds committed were different than the ones the symptoms had suggested. Burt, the lawn-and-garden associate, made transactions that showed up on employee discount and void exception reports. This fraud was actually a “free-bagging” scheme in which Burt gave inventory to an accomplice. The cleaning personnel were observed because of empty packaging found consistently after their shift. Betty’s off-duty fraud was considered shoplifting. Does this mean that Burt wasn’t abusing his employee discount or voiding sales to cover a cash theft, or that Betty and other cleaning personnel weren’t misappropriating assets while servicing the store? Or had these associates been committing multiple types of fraud on a regular basis?

As an employee continues to commit fraud, he or she becomes more comfortable and confident and will often increase the dollar amount involved in the scheme or will perpetrate other fraud schemes. Richard Hollinger, University of Florida professor and director of the annual National Retail Security Survey, said it perfectly: “Most people think they are going to get caught the first time they steal, then they think they may be caught the second time. By the third time, they think they are never going to be caught.”

LOSS PREVENTION AS A PROFESSION 

Loss prevention is an excellent way for college students to gain real-world experience dealing with fraud prevention and detection. Each company utilizes its LP department differently. The companies that will provide you with the best experience are the ones that have a LP department focused primarily on internal theft but are still involved with preventing and detecting external theft. Investigating potential internal theft issues will improve several skills including your assessment of sensitive or confidential information, analysis of internally generated reports, interviewing skills, and knowledge of occupational fraud schemes.

You might also choose to make LP a career. Most large companies have a loss prevention, asset protection, corporate security, or corporate fraud team at their corporate offices that include positions such as investigators, analysts, auditors, and directors. Whether you’re thinking about becoming a CFE, working in LP, or pursuing other similar opportunities, I’d recommend considering LP as a place to start. You get on-the-job training and experience in dealing with occupational fraud as well as developing a sense of how to analyze and improve internal controls.

Colin May, CFE, is a forensic financial investigator with a government agency (the views in Starting Out are his own) in Baltimore, Md. 

Mark F. Zimbelman, Ph.D., CPA, Educator Associate Member, is an associate professor of accounting and Selvoy J. Boyer Fellow at Brigham Young University in Provo, Utah. 

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