Study Shows Employee Theft Attributes to 15.9 Billion Dollars in Annual Loss to Retailers

Robert Capwell

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Retail TheftA University of Florida study reveals that in 2011 retailers experienced shrinkage of $35.28 billion dollars.  The #1 attributing factor to this loss was employee theft, which was estimated to be $15.9 billion dollars.

The National Retail Security Survey has been conducted since 1991 and continues to provide an authoritative view of shrinkage (i.e., financial loss) in the retail sector.  The study is supervised by Dr. Richard Hollinger and conducted by the University of Florida’s Department of Sociology and Criminology & Law.  The survey is the leading resource for the retail industry and loss prevention experts to share their experiences with retail shrinkage and current trends.  The 2011 study includes responses from loss prevention executives from over 100 major retailers.

According to the study, a sluggish economy continued to plague retail growth in many sectors as retailers faced challenges of slow growth rates, higher expenses, and shrinking profits throughout 2011.

A desperate economic climate continues to challenge retailers from the standpoint of both internal and external threats. Loss prevention experts try to stay one step ahead of internal theft and shrinkage as they battle inventory loss, cash, check and gift card theft, administrative errors, and vendor fraud.  The external threats that plague retailers are shoplifting, refund fraud, internet fraud, burglary, identity theft, and organized retail crime.

According to the study, there are four major sources of inventory shrinkage in the retail sector, and based on the percentages, there appears to be little change to the main categories over previous years:

  • 44.2% of loss due to employee theft
  • 35.8% due to shoplifting or organized retail crime
  • 12.1% due to administrative error
  • 4.9% due to vendor fraud
  • 5.3% due to unknown causes

The Overwhelming Loss Due to Employee Theft
Since the study’s creation, employee theft continues to be the #1 staggering factor of shrinkage and the 2011 study supports this finding with a total loss estimate to retailers at $15.9 billion dollars.  Employee theft far outweighs overall shrinkage in all categories at 44.2%.  What is even more alarming is that 8 out of 18 responding retailers reported employee theft rates well above the industry average.

The following are the top 10 retailers that are hardest hit by retail theft:

  • Convenience stores and truck stops
  • Shoes
  • Office supplies
  • Optical
  • Women’s apparel
  • Jewelry and watches
  • Auto parts/tires/accessories
  • Children’s apparel
  • Supermarket/grocery
  • Discount stores

Loss prevention experts continue to be vigilant in developing strategies to minimize loss and incorporate strategies in the following categories:

  1. Pre-employment integrity screening measures
  2. Employee awareness programs
  3. Asset control policies
  4. Loss prevention systems

Pre-Employment Integrity Screening Measures Used
Although all four (4) strategies are important, this article focuses on the first line of defense for retailers to assess the integrity and potential risks associated with new hires as loss prevention professionals incorporate a battery of background check and drug testing solutions.  Retailers also rely upon honesty tests, the search of previous worker’s comp claims, and handwriting analysis to assist with measuring integrity.

The following list is the top eight pre-employment screening measures used to assess new hires along with the percentage used by reporting retailers.

  1. Criminal conviction checks – 70.3%
  2. Multiple interviews – 68.3%
  3. Verify past employment history – 56.4%
  4. Personal reference checks – 53.5%
  5. Drug screening – 48.5%
  6. Driving history checks – 37.6%
  7. Credit checks – 35.6%
  8. Education verification – 32.7%

Retailers face an uphill battle when it comes to finding employees with high integrity, proper skills, the right experience, and low risk for potential workplace violence and theft.  When candidates compete for few jobs, they become craftier at stretching the truth or hiding negative information on their resume or job application so they stand out from the pack.  Even the best and the brightest should be labeled as suspect until their credentials are properly vetted by credible sources. As noted by the “Top 8” above, here are just a few reasons why retailers and all employers should conduct comprehensive background checks on all new hires:

1. Criminal Conviction Checks
It is no surprise that retailers rely heavily on criminal background checks considering the billions of dollars attributed to employee theft.  In addition, criminal background checks provide due diligence for increased workplace security and safety, and their use can reduce the potential of negligent hiring litigation.  Criminal background checks should be comprehensive and comply with all federal, state, and local laws.  A comprehensive background check should include a thorough search of criminal records within all areas where a candidate has lived, worked, and even attended school.  A thorough search of county, state, and national electronic records should be utilized to uncover potential criminal offenses committed outside a subject’s residential movement patterns. 

2. Multiple Interviews
Interviews should be conducted through structured questioning and assessment, as they provide key indicators into a potential hire’s abilities.  In today’s electronic age, interviews can be done offsite by either using basic Internet options or electronic video conferencing, which makes it fast and cost-effective.  Conducting multiple interviews utilizing varied personnel, such as a co-worker or department head, can even offer a different perspective of the candidate.  Many times a department or store manager will know more about their particular talent needs and have specific views or thoughts on who would be the “perfect employee.”  Collaboration across multiple sources will provide the best assessment.  

3. Verify Past Employment History
Previous employment experience and performance can be a great indicator of future performance success.  A thorough employment verification should never be taken lightly and retailers should never rely on a candidate’s resume or job application for this information.  Verification of the candidate’s supplied details is crucial, and connecting the employment history dots and looking for potential fraud is critical here.  Candidates will typically use creative methods to enhance their work experience by creating longer work histories with a particular employer; stretch position start and ending dates; and even hide previous employment that could uncover a negative employment experience.  Be aware that there are sources on the internet that will provide fraudulent employment verification information, even going as far as to provide the “verification number” to confirm the lies.  All work history information should be verified directly from the source.

4. Personal Reference Checks
Professional reference checks can provide in-depth information about a candidate not typically obtained through a standard employment verification.  When conducted by a skilled interviewer, professional reference interviews can highlight a candidate’s strong points, weaknesses, and moral character.  In addition, the interview may provide insight into how an employee may perform in a stressful situation or as a supervisor / manager. It may even demonstrate how they interact with co-workers or customers.

5. Drug Screening
Drug use in the workplace continues to have a grave impact on fellow workers and even customers.  Out of approximately 17 million abusers, over 75% are employed, which adds to safety risks, higher turnover, workplace injuries, and overall absenteeism.  Abusers cost employers billions in lost productivity and profits.  Employers that incorporate substance abuse testing programs will realize a decrease in workplace accidents, employee mistakes, absenteeism, employee turnover, and even reduced workers' compensation claims.  Other benefits are less tangible, such as improved workplace environment, employee morale, and customer satisfaction.  Retailers should consider pre-employment, random, post-accident, and return-to-duty testing as potential options for their program.  Drug testing programs should be designed in accordance with corporate objectives and within compliance of all state and federal laws.

6. Driving History Checks
A driver’s license verification should be conducted on ALL employees driving on behalf of a company, and not just conducted on employees driving company owned vehicles.  Employees driving on behalf of a company can pose a very high risk to passengers, other drivers, and pedestrians if they do not hold a current and valid license.  Any retailer takes on great legal liability if driving records of employees are not current or assessed regularly for potential concerns.  Verification of an employee’s driver’s license should be conducted on a pre-employment and periodic basis to verify it is current and does not pose any unforeseen issues.

7. Credit Checks
Credit reports are a critical element of the background screening process for many retailers.  Employees with a store security clearance, access to large amounts of cash, high valued merchandise and/or credit card information, and check signing authority or fiduciary responsibility must be credible and trustworthy.    A candidate’s credit history can provide insight into an individual’s financial responsibility, organizational skills, and propensity to steal.  Proper use of credit reports within the hiring process is imperative to avoid discrimination and legal liability.  Therefore, credit reports should be utilized by position and for job necessity and reviewed on an individual basis.  A complete understanding of the proper use of credit checks, along with federal and state guidelines, should be understood before the information is requested and utilized for hiring purposes.

8. Education Verification
For many positions, education credentials play a key factor in determining the knowledge a candidate possesses in a particular area of study.  In addition, basic or even higher education may play a role in advancement opportunities.  Padding or manufacturing education credentials provides a way for candidates to attempt to separate themselves on their application in hopes of being more competitive or to even qualify for a higher salary.  The practice of lying about education credentials leads to higher turnover, production loss, concerns for public safety, and the payout of higher and undeserved wages.  Education credentials should always be verified directly with the issuing institution, even if an applicant provides a copy of their diploma or a transcript.  With the increase in diploma mills across the world, it is imperative that employers confirm the candidate’s education credentials, as fraudulent diplomas can be easily bought over the internet. 

Conclusion
By incorporating a solid background check and drug screening program, retailers can assess, screen, and credential their applicants and employees to alleviate the overwhelming costs, risks, and liabilities that theft, fraud, embezzlement, and workplace violence bring into the workplace.  It is important that all employers work with their legal counsel to develop policies that are legally compliant and within EEOC guidelines.  Proper assessment, credentialing, and validation of a candidate’s knowledge and skills will help to ensure you find the right candidate for the job and ultimately add to the future success of your company.

Employment Background Investigations (EBI) works with retailers and employers globally to provide a full range of comprehensive and legally compliant employment background check, drug testing, occupational healthcare, and electronic form I-9 solutions.  Our "Just One Solution" suite of services will help reduce the risks and liabilities of a bad hire!  EBI is committed to providing employers with valuable education and resources on changing legislation and cutting-edge and compliant solutions to meet federal, state, local, and international mandatory requirements.  EBI is not providing legal advice or counsel and nothing provided in this document should be deemed as legal guidance or advice.  Readers should consult with their own legal counsel to determine their responsibilities or if they have questions on any information provided by EBI.

Background Checks, Drug Testing

Robert Capwell

Posted By: Robert Capwell

EBI’s Chief Knowledge Officer, Mr. Robert E. Capwell, is considered one of the leading experts in the background screening industry with over 22 years of experience in the field. Mr. Capwell was a contributing author of the second edition of the ASIS Pre-employment Background Screening Guidelines and has written numerous articles and whitepapers for various publications including a periodic column on background screening for The Society for Human Resource Management (SHRM) Online. He has been quoted in The Wall Street Journal, Human Resource Executive Magazine, Entrepreneur Magazine, and several HR-related publications. Mr. Capwell speaks regularly to industry colleagues and HR Professionals both nationally and internationally.

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