Volume 146 NO.1 January/February
I have heard so many stories from our furniture store clients about losses from employee theft...
by Crystal Migliore
You may be thinking that fraud is not a problem at your operation, but the statistics are sadly not in your favor. According to Hayes International’s 26th Annual Retail Industry Survey (2013), one in every 39.5 employees was apprehended for employee theft.
As a furniture store owner, what would it mean to add 5% to your annual revenue? That is the amount of money lost to fraud in a typical organization (ACFE 2014 Report to the Nations).
Aside from the monetary losses, thefts result in an erosion of trust and damage to company cultures, not to mention a huge amount of time and energy devoted to finding and repairing accounting falsehoods and prosecuting offenders. By taking a look at common misconceptions, I hope to point out some practices to keep your business safer from employee theft.
Some common myths people have about fraud are:
- We’re a close-knit organization, like family.
- Nobody signs checks but me.
- They’ve been with me for years.
- Thieves are disgruntled; my people are happy here.
- The office manager is on top of everything.
Myth 1: We’re a close-knit organization, like family
One of the most disheartening stories we heard was from a main street furniture store in a small town. The bookkeeper was the owner’s sibling. The theft involved tens of thousands of dollars and resulted in a serious rift in the family. A study of federal court activity in 2014 revealed that the majority of employee theft schemes are perpetrated by employees in senior roles resulting in a median loss of over $300,000. Just over half the cases found were in companies with fewer than 25 employees.
Myth 2: Nobody signs checks but me
Retaining signature power for checks is a powerful deterrent, and highly recommended. However, we’ve seen several incidents where employees successfully forged the owner’s signature. In one of these cases, an employee tampered with bank statement check copies to hide the theft. Some of these people were able to continue their fraudulent activities for several years before detection.
Myth 3: They’ve been with me for years
The average age of defendants in federal court cases was 50. One involved a 63 year old treasurer who stole over $1 million during a 12 year period of employment. In an all too common failure, the partners in this case did not fire the employee. Instead, she was allowed to stay with a promise to clean up her act. The thefts continued and when terminated, the employee sabotaged their books and wiped their computers depriving the company of years of records. Of the numerous employee theft situations we have encountered, only one involved a furniture store employee with less than a year of tenure.
Myth 4: My people are happy Thieves are disgruntled
Sometimes employees are happy because they are making a lot more by stealing than the amount that shows up on their W-2! One of our clients had trouble reconciling his mattress inventory, so he decided to follow his delivery truck on a high-end mattress return. Once retrieved, the mattress did not return to the warehouse. It was delivered to the house of a family member of the delivery staff.
A study of court cases from 2014, the most common job description for perpetrators of theft was office manager. Two of the worst situations we heard about involved office managers in furniture stores. In both cases, these employees seemed enthusiastic about learning systems that contributed to the smooth running of the business. It became apparent later that they were actually learning how to steal from the store. Tens of thousands of dollars were taken before they were apprehended. In another case the office manager directed delivery staff to place items in her vehicle, saying that she would take care of the paper work when she got back to the office. Once she returned to the store, she changed the in stock quantities to reflect the lesser inventory count.
Myth 5: The office manager is on top of everything
Steps To Prevent Theft
Now that we have debunked some of the reasons you think employee fraud cannot happen in your company, we can move on to steps every furniture store owner can take to lessen the likelihood of becoming a victim.
The most powerful and absolutely free fraud deterrent is to set a tone in your company that fraud at any level will not be tolerated. Talk about fraud prevention, and let employees know that they are part of the internal controls in place to protect the company and its assets. It can also be helpful to educate employees on the damaging impact that theft can have on the company, and ultimately their employment.
Basically, every case we’ve encountered could have been prevented by using best practices in the accounting and inventory management functions of the business.
Create Separation: Creating separation in your processes is where this starts. For instance, the person who reconciles sales invoices should not be the one who makes the bank deposit, and the accounts payable person should not be the one who reconciles the bank statement. Delivery staff should not be able to change stock quantities for inventory. When no single employee controls a process from start to finish, it is difficult to manipulate the records to hide theft.
Owner Oversight: The single most important practice an owner can implement is to personally look at their bank and credit card statements. If anything looks out of place, or you do not recognize a payment, it needs to be investigated. Consider having bank statements mailed to your home (if you do not typically open all the mail at the office, or retrieve your statements online), so they cannot be tampered with prior to reconciliation or review.
Accurate Inventory System: If you do not yet have a system for recording an accurate count and value of your inventory items, now is the time to start. An unscrupulous employee will quickly determine if ownership cannot prove their inventory numbers and find ways to profit.
Perception of Detection: Create a “perception of detection” by conducting surprise audits. This can be as simple as asking to see the bank reconciliation process while it is in progress. Just compare the checks included in the bank statement with those listed in your company ledger. Do periodic inventory counts to see if items listed as in stock are actually there. Review payroll reports over several months to look for anomalies or unauthorized changes in pay rates.
Employee Screening: Screen new employees thoroughly. Background checks are a start, but they do not reveal arrests without convictions, plea deals or settlements. Credit checks (where legal), reference checks and comprehensive interviews provide additional protection. A good practice is to trust, but verify, with employees.
Vendor Fraud: Keep close tabs on your vendors. Vendor fraud, where invoices were paid to vendors for work neither authorized nor performed resulted in the largest dollar losses in cases before the courts last year. Insist on seeing invoices from any vendor you do not recognize. If you still cannot place the charge, contact the vendor to find out who authorized the work that was billed.
Insuring Against Theft
If you suspect fraud, the safest route is to retain legal counsel. A law firm with experience in white collar crime can give you guidance about how to best protect company interests including protecting yourself from potential employment claims. Legal counsel can also engage forensic accountants to work under attorney client privilege while investigating the scope and extent of fraudulent actions to find the parties responsible. It is critical to move as quickly as possible to prevent loss of evidence and further theft.
Another avenue of protection to consider is insurance coverage for employee theft. Not all commercial liability policies include such coverage, but your insurance agent can advise you on costs and limitations. In addition to reimbursement for employee theft losses, insurers often have resources for internal audits and tips for prevention. These resources may even be available if you choose not to include coverage. Further investments in fraud prevention include alarm systems that record who is accessing your building and cameras in areas where cash or merchandise could leave the premises.
The good news is most employees are honest and dependable, but good practices in fraud prevention will keep even more of them performing well. It can also keep the dishonest employee from making your business the next target of their schemes.
About Crystal Migliore: Crystal Migliore is President of Genesis Software Systems. Crystal is passionate about seeing her clients succeed and providing resources that make life a little smoother. Genesis Software Systems has been providing easy to use inventory management and accounting software to furniture retailers for nearly 30 years. You can contact Crystal at 509-536-4739 or firstname.lastname@example.org.
Furniture World is the oldest, continuously published trade publication in the United States. It is published for the benefit of furniture retail executives. Print circulation of 20,000 is directed primarily to furniture retailers in the US and Canada. In 1970, the magazine established and endowed the Bernice Bienenstock Furniture Library (www.furniturelibrary.com) in High Point, NC, now a public foundation containing more than 5,000 books on furniture and design dating from 1620. For more information contact email@example.com.