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Theft Control Starts with HR Strategies

April 1, 1993
Related Topics: Miscellaneous Legal Issues, Featured Article
It's 5:00 on a Wednesday afternoon. Deep inside the bowels of a sprawling manufacturing facility on the western side of Los Angeles, a security guard is busy securing the complex. He shuffles down a hallway on his way to a vault-like room, steps inside, makes sure that all the merchandise is secure and then proceeds to latch and lock the steel door that reads, Unauthorized access denied. Yet amazingly, the merchandise that he's paid to protect isn't ultrasophisticated navigation systems for the military or even valuable computer equipment destined for offices around the country. This stuff is decidedly more low-tech: children's dolls.

The location? A major toy manufacturer. The problem? Employees who have a tendency to pilfer dolls and whatever else they can get their hands on. This is no game. Left unchecked, the company easily could hemorrhage to the extent of hundreds of thousands of dollars a year in revenues. Ultimately, that could affect profits, jobs and even the firm's ability to offer competitively priced products to the rough-and-tumble of the marketplace.

Employee crime. The words send shivers down the backs of corporate executives throughout America—and for a good reason. It's a problem that affects virtually every organization. The U.S. Chamber of Commerce estimates that employee theft costs U.S. businesses $40 billion annually. Unofficial estimates run as high as twice that amount. In addition, approximately 20% of all businesses fail (more than 16,000 U.S. firms annually) because of internal theft.

Crime in the workplace hikes retail prices approximately 15% to 30%. In the supermarket industry alone, employees admit to stealing an average $168 per person annually. Employees estimate that their co-workers pilfer an average of more than $1,000 a year, according to the study that was conducted by the Food Marketing Institute, and Rosemont, Illinois-based London House (see "Employees Steal from Supermarkets as a Way To Get Even."

"Economic crime is a problem that is 10 times greater than street crime," says Thomas W. Wathen, CEO of Van Nuys, California-based Pinkerton Security & Investigation Services, "but in most cases there are no police cars, sirens, guns or TV coverage. It ranges from paper clips and rubber bands that find their way innocently into purses and pockets, to employees' permanently removing assets—computers, telephones, supplies and money."

Dennis Dalton, a Fremont, California, management and security consultant for a "Who's Who of Fortune 500" firm, adds, "Companies are expanding their security forces. They're installing advanced security systems and spending increasing amounts of money trying to protect themselves, but the problem isn't going away."

Why do employees steal?
Experts say that the reasons for economic crime in the workplace are numerous. At the heart of the problem, of course, is human greed. Combine one part temptation with one part opportunity, and you wind up with a formula that can translate into significant losses.

The issue, however, cuts deeper, according to Dalton. Lax hiring policies, allowing longtime employees easy access to money and products, a corporate attitude that appears resigned to a certain amount of crime, and executives who project a callous and uncaring attitude toward employees, all play a role. "If people see their friends getting laid off or if they're worried about losing their own jobs, they may feel that they should get what they can while they can. Virtually all of the individuals who steal from an employer feel that the company is big and can afford it," says Dalton.

No one particular group of employees is responsible for the problem, however. These days, people who have larcenous hearts are just as likely to wear lab coats as they are to wear blue jeans, and middle-and upper-level management is just as much a threat as retail clerks or bank tellers. In fact, managers "usually are the ones who have access to the organization coffers and can move assets around without raising questions," Dalton says.

Factor in the ease with which employees can manipulate and remove the information from a computer (workers can cart off the equivalent of an entire file cabinet on a pocketful of floppy diskettes) and the potential for loss is enormous. This potential is especially prevalent among industries whose products have a broad consumer appeal or a high degree of scientific or military value. Among these industries are: high tech, information services, fashion and clothing, food, liquor, household items, and toys.

How can a company protect itself? How can human resources managers and personnel directors build an honest and reliable employee base? Just how much security is enough without turning a firm into a fortress and creating an intolerable working environment? There are no easy answers. "It largely boils down to economics and trade-offs," says Daniel R. Blake, a consultant to the security industry and a professor of economics at California State University, North-ridge.

Blake maintains that virtually every company has a level of theft that it views as being acceptable. "Are you going to terminate people for taking pencils and erasers home? For making personal phone calls? Even after an audit, there's usually an acceptable level of shrinkage. At a certain point, the cost of security far outweighs the cost of theft. The layers of bureaucracy designed to prevent crime can hinder a company's ability to function. Ultimately, it's a question of what a company deems to be acceptable, and what it is and isn't willing to tolerate," says Blake.

HR confronts workplace crime.
Albert E. Prendergast, senior vice president of human resources for New York City-based MasterCard International, believes that the foundation for building an honest work force lies in the corporate culture. "If you have an honest CEO, who makes it clear that he or she wants employees to act honestly and who tells the truth, it lays the groundwork for an open and honest community. It tends to weed out many employees who don't fit in," says Prendergast. "We've taken the position that we want a clean company and that we aren't going to tolerate white-collar crime."

Because there are more than 1,400 employees and 200 others who work for the credit-card giant on a temporary basis, it's no easy task. In spite of the difficulties, MasterCard takes a firm position on the issue. The company routinely terminates employees who lie about themselves on applications—even if it's about which colleges they've attended or they've indicated they have a college degree when they don't. It uses security checks and verifies applicants' education and employment records before hiring them. It also runs credit checks. "Obviously, you don't want to put an uncreditworthy person into a position in which he or she has access to blank credit cards," explains Prendergast.

MasterCard tries to encourage honesty by offering a generous package of benefits, incentives and rewards. It offers standard retirement, health and dental coverage but also provides employee assistance programs, including counseling. Equally important, it has several employee-recognition programs and bonuses that reward employees who are outstanding or provide useful ideas to the organization. (These employees receive plaques, luncheons and financial rewards ranging from $500 to $5,000.)

Even that isn't enough to eliminate all the problems. Some employees process hundreds of thousands of dollars in payments every day; others create emergency replacement cards for members. The latter group often is responsible for shipping blank credit-card stock. On the street, each card is worth thousands of dollars in the black market. Despite strict audits and stringent controls (including requiring two employees to access blank credit-card stock), a thief occasionally emerges. When one does, the company is quick to terminate the employee, demand restitution and prosecute. As a result, MasterCard has taken only three hits in the last five years.

Other human resources executives feel equally strong about creating and maintaining a work force that is committed to honesty. Like MasterCard, they see the advantages of creating a positive environment. Lotus Development Corp.—the software giant based in Cambridge, Massachussetts, that makes Lotus 1-2-3 and a half dozen other popular computer programs—long has had one of the most progressive employee-benefit packages around. It includes job sharing, flexible work hours, paternity and maternity leave, domestic-partner benefits for gay and lesbian employees, and on-site day care. The company doesn't keep track of lunch hours and doesn't push for excessive after-hours work.

"At a certain point, the cost of security far outweighs the cost of theft. Ultimately, it's a question of what a company will tolerate."

In addition, new employees sign a nondisclosure statement, promising that they won't leak trade secrets, intellectual property and other important information. The result? "A very minimal" problem with shrinkage, and a "below average" amount of employee crime for a high-tech company in an urban environment, says Daniel Rattner, Lotus's director of security.

Communications giant AT&T combines a strict code of conduct with a solid benefits package. When AT&T hires someone, the company notifies him or her that travel receipts, bills, virtually everything involving company money, will be checked by a supervisor and audited by the accounting department. The company gives its managers an approved list of travel agents and a corporate credit card.

"Deep in the heart of a dishonest person, there's a greater fear when fooling around with a corporate card than when using a personal card and filing false receipts," says Burke Stinson, a specialist in human-resources-related matters for AT&T. "Expense accounts are a lot like tax returns. When most people fill out their income tax forms, they don't have one hand on the Bible."

But AT&T also works to maintain a feeling of goodwill. The New Jersey-based company has a policy of picking up the tab on retraining and education costs for workers who lose their jobs through staff reductions or are reassigned. "The person winds up becoming gainfully re-employed, and we wind up having fewer problems with theft and sabotage," says Stinson. "It's no secret that people who are basically honest sometimes retaliate because they're angry and frustrated. If they feel that they aren't getting a fair shake, they rationalize that it's OK to steal."

Fair treatment of workers can deter workplace crime.
According to Dalton, disgruntled or disenfranchised employees are one of the biggest threats to a firm. "If a large organization has gone through a lot of layoffs or turmoil, the employees often lose their identification with senior management, especially if they see management still pulling down huge salaries," says Dalton. "Their attitude typically is, 'They don't know, they don't care and they don't understand.' That could result in a programmer's unleashing a computer virus into the system or a mid-level manager's selling information to competitors. Someone who has worked for the company for 20 or 30 years may be tempted to get what he or she can before getting the ax." In such instances, Dalton suggests providing outplacement assistance, and psychological counseling may be necessary for employees hit with a layoff, as well as for survivors. Such programs, he insists, can reduce theft and sabotage.

Firms in which senior executives set a poor example or aren't punished adequately for their wrongful actions present an equally nettlesome problem. CEOs who wheel and deal, and who play loosely with the truth, may set the tone for the entire firm. Likewise, when companies give top executives a slap on the wrist or go so far as to pay them hush money to leave quietly when the company catches them embezzling or stealing, word filters through the organization. "Employees see a double standard, and quickly become disenfranchised," warns Dalton.

Consider the case of the so-called "Candy Bar King," who ran a multimillion-dollar candy company headquartered in the Midwest, says Dalton. The CEO couldn't resist the temptation to take several boxes of candy bars home with him every night—something employees knew about but the organization didn't allow them to do. Finally, under increasing pressure, the firm's security director confronted the CEO. The company's board of directors eventually asked him to step down, but opted against legal action or requesting restitution, which would have amounted to several thousand dollars. Employees became increasingly demoralized, and productivity dropped for several weeks following the episode.

"Companies that don't take the threat of crime seriously simply are playing Russian roulette."
Dennis Dalton,
Security consultant

Even the best corporate culture and the most secure environment aren't immune to employee theft. When the company catches someone with his or her hand in the till, how it reacts has a lot to do with whether employees will repeat such incidents in the future. A company can deal best with questionable or minor actions by reprimanding or warning employees, say the experts. But Wathen believes that strong and swift action—in most cases prosecuting to the fullest extent of the law—is essential when it's a clear-cut case of theft. The fear of bad press effectively undermines a company's stand on the issue and sends workers a mixed message, he says.

Wathen knows just how difficult the situation can be. In 1988, his firm was stung when his CFO overrode long-standing company policy and hired an accountant without running a background check. The woman, who had three different names and Social Security numbers, skimmed $1.1 million from wire transfers before the company caught her. Wathen wound up paying the $100,000 deductible on the policy so that the insurance company would reimburse. He also managed to receive more ink on the story than he ever cared to. Today, the woman is serving a sentence in a federal prison. "She wasn't a thug; she was a highly qualified certified accountant," he says.

When it comes to such a big-money case as Wathen's, the decision to prosecute is usually clear-cut. When a case involves smaller sums of money, the issue frequently becomes mired in economic issues. In many locales, the district attorney's office won't investigate minor crimes. It's up to the company to prepare the case and follow through with the prosecution—a process that can use up valuable time, money and resources. "Many companies simply decide that it isn't worth it. It's easier to terminate the employee and have him or her pay restitution," Blake points out.

Prendergast is part of a growing legion of HR and security managers who take a hard-line approach. All three times that an employee has stolen from the company, it has pursued restitution aggressively. In two of the three cases, the company prosecuted and won. The amount of money MasterCard has recovered through restitution by a former employee has been as high as $20,000.

"The issue is very simple," says Prendergast. "Either you take white-collar crime seriously or you decide that you're going to tolerate it. Once you decide that it's all right, you have serious problems on your hands."

Employees don't always steal a company's most visible assets.
If there's one thing that has become painfully clear to everyone, it's that today's corporate crooks are shrewd opportunists. They'll go to great lengths to steal. Put a system of checks and balances into place, and it won't be long before the crooks figure out a way to operate just beneath the level of discovery. Install hi-tech security and video monitoring, and post guards—they'll still find a way to short-circuit the process. "All the security measures in the world can't eliminate white-collar crime, although they certainly can reduce it," says Dalton. "There's always someone out there who can figure out the system and find a way to steal."

Consider the case of one hi-tech company that saw large amounts of inventory disappearing and knew it was an inside job but couldn't find the culprit. Indeed, the thief was able to bypass a sophisticated key-entry system without showing up on a video camera that activated whenever the gate opened. Only after installing a second, totally hidden video camera, did security discover the source of the problem. One of the firm's managers had been disconnecting the primary video camera and then reconnecting it after hauling off the inventory. Someone watching the tape never would have noticed any inconsistency.

Money and goods aren't the only major targets, however. In the ever-broadening universe of corporate crime, information and trade secrets also have become hot commodities. The information worth stealing might be a computer code for a new software program or a marketing plan for a new product. It could be a recipe for chocolate-chip cookies or a client list.

No matter the circumstances, the threat is real. "The idea of a person rappelling up an office building at night, wearing a Ninja outfit, is a sexy, splashy Hollywood thing, but it isn't reality," explains Dalton. "Usually, it's as simple as a competitor approaching an employee and offering cash or a position."

Consider it no surprise, then, that a growing number of personnel directors and HR executives are digging deeper than before into applicants' backgrounds. They're studying personality traits for clues to how a prospective employee might behave when faced with temptation or stress. The goal, of course, is to sidestep potential thieves by not hiring them. The idea is to mold a work force that's as free from the influence of criminal minds as possible.

It isn't an easy task. For years, the courts have chipped away constantly at an employer's ability to ask certain questions and to use such controversial testing methods as the polygraph. Employee-rights activists would say that it's all for the best. Yet no matter where one stands on the issue, security experts like Wathen argue that the pre-employment process is still the key. "If you recognize that the majority of theft problems are employee-related, it makes sense that the majority of the security expense ought to go into the hiring process as opposed to into after-the-fact surveillance and monitoring," says Wathen. "The most important thing a company can do is to make sure that it knows whom it's hiring."

Background checks and pre-employment tests can help prevent theft.
Wathen believes that it's crucial to conduct background and reference checks. Keys to prevent hiring a would-be crook include:

  • Calling another company to verify dates of employment
  • Checking with a university or trade school to see whether the person actually graduated or not
  • Interviewing personal references more thoroughly.

This also can involve administering psychological tests, handwriting analyses and even polygraph tests in industries that still allow them, such as security and pharmaceutical companies.

There's no question that some companies take the hiring process far more seriously than others do. At Continental Bank in Chicago, the human resources department routinely checks the FBI computer for convictions and breach-of-trust violations, and verifies information that's provided on the application, including interviewing the references. The bank's managing director of human resources, Susan M. Miller, says that the firm has a policy of checking with past employers. Continental Bank also investigates periods of unemployment, to determine what an individual was doing during that time.

If the bank uncovers a problem on the FBI check—something that happens from time to time—the company disqualifies the applicant automatically. If it's somebody the bank already has hired, HR promptly terminates him or her. Likewise, if the personnel department discovers that a new hire has lied about anything on the employment application, "Ninety-nine times out of 100, we'll fire the person. It's a misrepresentation, and that isn't the kind of person we want working for us," says Miller.

In addition, Continental—which has 4,200 employees—uses drug testing. The bank also has been known to assess a service that provides lists of people from various firms that security personnel have caught stealing—even if it didn't result in a conviction. Perhaps the most important precaution the company takes is conducting a thorough interview. "We depend a great deal on the expertise and professionalism of our interviewers," Miller says.

Department-store-giant Nordstrom Inc. takes this process one step further. It too uses pre-employment background checks and FBI checks for all applicants in the Los Angeles area. But beginning about a year ago, the company also began using psychological testing to screen the applicants who pass the first round of interviews.

At Nordstrom, testing so far has weeded out 27% of the individuals who take the test. When combined with an FBI check, the company turns away 50% of all potential new hires.

According to Joe Demarte, vice president of personnel at the company's Seattle headquarters, the test cuts across racial, age and gender lines. "It's amazing what people will admit to," he says. "Testing clearly increases the probability of hiring someone who's responsible and honest."

Pre-employment screening is only one part of the equation, according to security experts. Wathen says that maintaining an honest work force requires ongoing evaluation and testing.

"Just because a firm decides to pay close attention to hiring and training doesn't mean that it's all right to forget monitoring and surveillance."

Dalton concurs, noting that human resources should revisit many of the screening tools used in the hiring phase at periodic points during an employee's career. "As time passes, people's lifestyles and situations change. A 19-year-old whom tests reveal to be honest and who does a good job may begin dating someone who uses drugs or has racked up a huge debt. The significant other can have a profound effect on a person's behavior," says Dalton.

Experts say that it's also important to educate employees about the effect crime has on the company. Whether it's done at an orientation or is an ongoing process isn't important. Nor is it important whether it's handled by human resources or security, says Wathen. The key is making sure that employees understand the issues and reminding them on a regular basis.

"The majority of Americans don't understand that the free-enterprise system isn't indestructible. They don't understand that losses related to theft directly affect their opportunities for promotion, bonuses and profit sharing, and that these losses might even cost them their jobs. They think that a company has a deep pocket and that it's all right to steal," says Wathen.

Finally, security experts insist that just because a firm decides to pay close attention to hiring and training doesn't mean that it's all right to forget monitoring and surveillance. Despite the increasing complex web of laws, it's still possible to prevent theft, says Robert D. McCrie, a professor at the John Jay College of Criminal Justice in New York City and editor of Security Letter. Companies can catch crooks by using cameras, street surveillance, aerial surveillance and sophisticated computer software that can track inconsistencies in everything from cash registers to telephone logs. McCrie says that there are two key elements to using surveillance effectively:

  1. Making sure that a company does all of its monitoring in public places.
  2. Being sure that employees know that monitoring may take place on company property.

Ultimately, according to Dalton, companies have to fight the war against crime on several fronts. A firm must provide an environment in which management treats its employees fairly and compensates them well. It also must use stringent screening and hiring procedures, establish a high level of security and show that it doesn't tolerate serious theft.

"Companies that become lax or don't take the threat seriously simply are playing Russian roulette," states Dalton. "The only difference between their approach and Russian roulette is that the chances of employee theft are a lot greater. They're playing with three or four bullets in the chamber rather than one."

Personnel Journal, April 1993, Vol. 72, No. 4, pp. 80-91.

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