• Niels Strohkirch

Retail Fraud - Right under your watch! And what you can do to minimise your risk.

Let me start with the bad news right away: Whatever you do there will be a “great mind” finding a way to circumvent and misuse your store processes, safe guards, IT systems, internal audit teams, external auditors, managers, COO, CFO etc. in order to perpetrate fraud.


In my 8 years as a CFO in luxury wholesale and retail, I was often astonished to learn how crafty some employees could become to siphon out cash or merchandise. I wonder how successful they would have been in corporate life were they to have used this “talent” in a positive way. Unfortunately, most of them lost simply their job with a hard challenge to get another in retail. Some had to face the even harder challenge of a stretch in jail.


Sad to note that for every “successes” one might have detecting a fraud, the likelihood is that between three and five other cases are going on right under your nose. Frustrating yes, but part of the truth you have to face as well.

But, and the big BUT! is that there is plenty you can do to minimise the chances of retail fraud going undetected, and when it does occur, a good chance of having sufficient evidence in your hand to pursue whatever consequences you deem appropriate.


Retail Fraud is typically not detected by internal audit teams or any person who has to monitor or control. Most of the time “accidents”, sudden changes in process, mostly un-planned, bring it to light. Another frustrating fact when combatting retail fraud.


There is no process or Standard Operating Procedure (SOP) in this world that will stop people with enough ill-will and determination from stealing money or merchandise. Accepting that is the first step to overcoming the problem. Rather than believing that all fraud is avoidable and preventable, it is advisable to concentrate on the following:


Ensure that whatever you lose is not threatening the existence of your business, be it financial or reputation lossEnsure that in case something “goes out the door” that youdiscover it right away (ideally within 24 hours) andthat you can determine the “loss” fast (again within 24 hours)


How does fraud happen and what can you do?

I focus here on internal fraud only - employees stealing from employers - rather dealing with loss through customer retail theft or even worse, robbery. There is no denying of course that customer theft is part of retail reality but by adopting some basic procedures, incidences can be minimised. For example, whatever is under glass, such as luxury watches or jewellery, can be shielded from direct contact by customers without the assistance of a staff member - such merchandise should never be a theft risk. If it happens something is really wrong.


Other types of theft should should not amount to more than a specific percentage of retail value sold in a month. You may lose something but it will never threaten your existence. Typically the biggest risk comes from internal resources - your own staff!


Whatever process you implement, your staff down on the floor will be the first ones to discover the flaws in those processes. In luxury retail, the nature of the work is that you wait for 12 hours for “the customer of the day” giving staff plenty of time to figure out any loopholes. Some standard procedures do also present a risk but are hard to eradicate as they would effect your business performance.


For example: it would be wise to only accept credit card sales to avoid any kind of cash theft and banking-in risks. Of course, this would not be practical for a number of businesses, particular in Asia, where many customers prefer to pay cash.


Another key concern would be to avoid a cancellation of a purchase or the customer changing his/her mind after they had bought an item as this opens up the risk of misuse in the system, while any stock loss is only revealed at the next stock count.


The best way to minimise the risk on internal fraud is to use a number of measures:

Adopt stringent Operation Procedures with at least yearly reviews and updates. Focus on cash handling and cash banking-in. Ideally performed daily and verified the following morning.Avoid having more cash in the till than necessary to minimise temptation.Enforce the counting of cash under the “4 eye principle” and with CCTV capture. Update procedures immediately on discovery of any fraud incident.Conduct surprise audits to increase the chances of detection. Carry out such audits or spot checks right after closing time to verify all is in order. It is all about keeping your employees "on their tip-toes".Review CCTV footage on a regular basis. It’s quite astonishing what this sometimes reveals - once we saw staff dancing on the counter right before closing time. No fraud, but still…Hire an external provider to carry out checks on service levels and conduct mystery shopping.If fraud is discovered, ensure that the employee(s) is prosecuted and send a strong message that any other employees caught will also be prosecuted to the fullest extend of the law. Talk to your staff regular on a regular basis and build trust. Some may already feel uncomfortable if they suspect any issues. Others may be intimidated by the culprit(s) and will open up very quickly after being questioned.


Accepting that retail theft and internal retail fraud are going to be a part of any business will ensure that you focus on the big risks. This will help you to avoid a major threat scenario where you either lose cash or reputation or both which could significantly harm the sustainability of your business.


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