Winning the Battle Against Internal Theft

A jewelry store manager notices diamonds in a ring have been replaced with CZs. A vendor demands payment for memo merchandise a jeweler says he never received. A necklace is missing, and no one on staff knows why. A store owner learns an employee hasn’t made bank deposits for days. A store’s petty cash drawer is almost empty, with no receipts. An angry customer says she didn’t order an expensive watch charged to her account.

These cases all have one thing in common—theft by a jewelry store employee.

Internal theft is “the single most significant cause” of annual retail inventory shrinkage, says the University of Florida 2003 National Retail Security Survey. The study, which surveyed retailers across the country, says internal theft accounts for almost half (47%) of all shrinkage—far exceeding shoplifting (31%) or administrative error (15%)—and costs $15.8 billion annually, “a staggering monetary loss to come from a single crime type.”

It should come as no surprise that internal theft is a major risk in the jewelry trade. It is, after all, “where a single item worth thousands of dollars can fit into a thimble or a pocket,” notes jewelry insurance expert Robert G. Carroll. Jewelers surveyed by the University of Florida said 41% of their inventory shrinkage was due to employee theft. A more extensive survey of some 20 national and regional chains by the Jewelers Security Alliance (JSA) put that number at 50%, but the problem “happens to independents, too,” notes JSA president John J. Kennedy, “and when it does, it can be devastating, because a loss of hundreds of thousands of dollars hurts a small business more than a chain.”

Details on internal theft are difficult to get from independents. “It’s something jewelers don’t want to admit to,” notes Luis Alvarez, managing partner of Palazzo Jewelers, Addison, Texas. “They feel such matters should be taken care of internally.”

The problem, however, is that many don’t deal with it. They prefer to overlook “disappearing” merchandise and cash, or blame recordkeeping errors, sloppy housekeeping, or outsiders who “switched that ring.” They assume the people working for them, especially longtime staffers or relatives, won’t steal from them. If one is caught, that person often is quietly let go to avoid publicity or embarrassment.

There’s another reason internal theft is ignored or unreported by jewelers: “No jewelers block policy I know of covers employee infidelity,” says Carroll. And, while “employee dishonesty” coverage is available under some business liability insurance, he notes, reimbursement is limited (usually to $10,000)—assuming a loss can be proved—and even then, not all employee thefts are covered.

So, what should jewelers do? While employee thefts are costly, prevention isn’t. What’s usually needed are common sense, shrewd observation, and sound management policies. Here are some tips to combat this most serious form of inventory shrinkage.

Warnings

Forewarned is forearmed. Here are warning signals that indicate a problem could exist.

  • Lifestyle changes. “Does someone suddenly have a new car, better clothing, or brag about taking their girlfriend to the best restaurants?” asks Robert Baldwin, a veteran security consultant with the Control Risks Group. Baldwin, who is familiar with the jewelry industry, adds, “If that person is spending beyond his or her known compensation to support that, you need to take a look.” There could be a good reason, but it may also indicate someone taking advantage of their position and living beyond their means—and tapping into yours.

  • Personal woes. Does a staffer seem to have a drinking or drug problem? Is he or she struggling to make ends meet due to a divorce, a large family, heavy medical costs for a relative, or because a spouse in a two-income family has lost his or her job? “In many instances of internal theft, we see people under stress from ‘life circumstances’ such as family crises, gambling, or extramarital affairs,” says JSA’s Kennedy. Such problems don’t automatically mean someone will steal, but “a manager should be alert to these risk factors,” Kennedy warns. “I’ve talked to many owners who knew an employee was having problems—and then couldn’t believe it when that person was caught stealing from them.”

  • Indispensable? Be suspicious of employees and managers who insist on personally handling routine financial or clerical tasks—i.e., opening mail, overseeing shipments or inventory arrivals—and even refuse to take vacation or delegate duties when away. “That’s a telltale sign,” says Kennedy. “Financial firms actually require employees take vacations so others can do their duties as another way to monitor records.”

  • Complaints. Listen to customers who complain about overcharges, erroneous sales, missing repairs, or inconsistencies in shipping or billing. Investigating such grievances can reveal clandestine theft, says the SBA report.

  • No exceptions. Long-term service or a managerial post is no guarantee of fidelity. The Association of Certified Fraud Examiners has found that while lower-level employees commit most corporate fraud, higher-level ones are responsible for the big-dollar thefts. In the jewelry business, notes JSA’s Kennedy, “significant losses more often occur with longtime employees, rather than newworkers who can’t do as much harm as more trusted or experienced employees.”

Theft Prevention

A good defense is often the best offense against internal theft, say experts.

  • Proper hiring. “The first and the most important step,” says Texas jeweler Luis Alvarez, “is properly screening every potential employee, full-time and part-time.”
    After the first interview—”a getting-to-know-you session”—he calls a person back for a second or even a third. “Use hypothetical questions to make them think,” he advises. “We pose questions like, ‘If you’re friends with an employee who steals merchandise, what do you do? If something’s missing from inventory, what would you do? If you’re a store owner and catch someone stealing, what do you do?’ Their answers show how they’ll conduct themselves in a professional environment.”
    Discuss loss prevention policies and penalties with new hires. Alvarez is “adamant during hiring about internal theft and what we do if it occurs. We say, ‘We trust you, until you give us reason not to—and then we prosecute.’ We stress the importance of accountability, thereby creating a deterrent to theft and loss.”

  • Check up. Do background checks, “particularly for sensitive positions involving the flow of money,” says the SBA. Verify details on applications and résumés, notes JSA’s Kennedy, and check credentials and references “to ensure someone isn’t lying or making up information. Ask past employers if they’d hire that person again—and if not, why.” Also, adds Baldwin, do credit checks before and after hiring people, because “personal situations change over time.”

  • Pay attention! Be aware of warning signs and behavior indicating possible personal problems. Provide diligent supervision to “remove easy opportunities,” says the SBA. Don’t shrug off disappearing merchandise. That’s a common problem for both chain and independent jewelers, notes Carroll. “A disappearance may be due to an inventory control error, employee theft, or external reasons—but the jeweler must try to find out,” he says. Baldwin agrees. “If there are disappearances over a short time, an owner or manager should investigate quickly and thoroughly,” he says. Otherwise, it can happen again—and again.

  • Just a reminder … Tell staffers—new and old, full- and part-time—that you don’t tolerate theft and will prosecute anyone caught doing it, whether staff, manager, or top official. Carroll urges jewelry clients to include “a clearly written, no-tolerance-for-theft statement in their store policies, handbook, and training.” That training, say other specialists, should periodically remind employees how to prevent internal theft. It’s also helpful, they say, to provide a way to anonymously report illegal or inappropriate behavior without fear of reprisal—for example, using a phone number, suggestion box, or e-mail address.

  • Good records. The SBA points out that “most successful embezzlement schemes would fail if inventory and accounting records were organized and up-to-date.” That holds true in jewelry stores as well. Good recordkeeping, Robert Carroll declares, is “extremely important” in cases of internal theft, “more so than other forms of loss.” When records are sloppy, poorly organized, or outdated, it’s harder, and takes longer, to detect theft and prove it for legal or insurance purposes.
    Don’t forget cash, credit, and shipping, says Baldwin. “Many pay attention to cash registers, but not petty cash—until it’s almost gone with no indication where it went.” On credit sales, “inordinate amounts might be overlooked when times are busy and charges numerous, like holidays. An associate might ring up two sales on the same card, when a customer only signs for one, or use an authorization code for several alleged sales. By the time a customer or card company uncovers unauthorized sales, the employee responsible may have left. So, be attentive!”
    Log shipping orders, he adds, especially outbound ones. All should have an approved telephone or purchase order number. Note, too, multiple shipments within a short time to new or unfamiliar addresses.

  • Dual controls. “No one except the owner should have sole authority for any function in a store,” says Kennedy. “A person handling incoming shipments shouldn’t also do inventory; the one responsible for bookkeeping shouldn’t be opening mail. Someone should always be looking over someone else’s shoulder.” Dual control is vital in inventory and money matters, notes Baldwin. Two people should sign for incoming merchandise, to open and close out cash drawers, or sign off on bank deposits.
    Some jobs, add other experts, should be rotated regularly, as an added check on records, so no employee gains too much authority and to frustrate possible collusion (between staffers or between an employee and an outside source, like a supplier).

  • Frequent inventories. “Every store should do regular inventory control—weekly, monthly, or bimonthly—rather than just at year’s end,” says Alvarez. “We inventory a different department each month, and I personally do a monthly count of diamonds.”
    Baldwin suggests frequent case counts and random counts of SKUs in back stock. Kennedy recommends unscheduled checks, too. “If someone’s a thief, and knows your inventory schedule, they’re prepared,” he says. “If you also do unannounced surprise inventories on specific categories, it throws them off and can deter internal theft.” Other experts urge cleaning up store areas where stolen items could be hidden and having the owner come in unexpectedly on days off to do inventory. The SBA suggests having a top manager or outside auditor do unscheduled inspections of records and inventory.

  • Satisfied workers. Satisfied employees who are valued by their bosses are less likely to steal, say specialists. Encourage and motivate them with job incentives, good salaries and benefits, proper training (including how sales and shrinkage are related), and clear tracks for career advancement. If feasible, offer profit sharing or even stock options to build loyalty, say experts, and align employees’ interests with the store’s. Have an open-door policy, provide help (for example, financial counseling) to those with personal problems, and consider a drug and alcohol screening program.

  • Technology’s tools. Alan Markoff, president of New York Security Systems, notes that in-store digital surveillance cameras can be programmed to “follow specific people, record activity at certain showcases, focus on a specific product, and record how often a product is shown.” They also can “be hooked into the Internet so an owner can watch his business anytime, anywhere in world,” says Kennedy. “When employees know that, it scares those with larceny in their hearts.”

Some retailers combine point-of-sale systems with bar code technology for better control of inventory. Others combine loss prevention software (which automatically checks records for anything suspicious) with digital video to quickly view questionable transactions.

Digital keys and locks can be “individually programmed by a jeweler for each person on staff, for specific schedules, for seasonal or part-time employees, staff changes, or to restrict access to specific items, showcases, or locations,” says Paul Fullmer, account executive with 5Stat, an access control systems firm. “A jeweler not only controls access, but knows who went into a case or location and when.”

With such monitoring tools, says an SBA report, “Workers will be less likely to steal [when] they think there is a good chance of being caught.”