The Damage Of Theft To A Company Business Essay

The Damage Of Theft To A Company Business Essay Employee theft is always been costly to any business. This is still more appropriate in case of big retail chain organizations. The enhanced security arrangements in the recent times have made this topic more important than ever. This research is conducted to investigate the possible reasons for employee theft in supermarkets in Malaysia. It identifies the relationship between various factors with the employee theft behavior. It aimed to develop a model to help big retail chain organizations to design effective internal control systems to prevent/reduce employee theft. This chapter covers the following sections: 1. Background to the research 2. Malaysian retail industry and retail shrinkage 3. Research problem, issues and objectives 4. Justification for research 5. Whats new in this research? 6. Organization of this thesis 7. Definition of terms and 8. Summary 1.1 BACKGROUND TO THE RESEARCH Retailing crime continues to be a challenge for businesses in the USA and elsewhere (National Retail Security Survey, 2003). Retailing crime is financial loss attributable to a combination of various factors like customer theft, employee theft, internal error (administrative or process error) and supplier-vendor frauds. The recent worldwide shrinkage survey revealed 42.4% of the retail shrinkage was due to customer theft, 35.3% due to employee theft, 16.9% due to internal error and 5.4% due to suppliers-vendors frauds. Total global shrinkage in the 42 countries surveyed costs retailers U.S. $107.3 billion ($107,284 million), equivalent to 1.36% of retail sales: a serious threat to retailers bottom lines particularly at a time when many retailers are beginning to feel the pinch of an economic downturn. A key point to be noted is that the cost of shrink is ultimately borne by not only retailers, but also by consumers and society at large. Here Shrinkage or shrink refers to an accountan cy figure, reflecting the difference between the financial revenue the business should have received (based upon inventory and purchases) and the amount actually received. (The Global Retail Theft Barometer, 2010). The Barometer further confirms that retail shrink is a global issue: it is a common problem across all countries, regions and market sectors. The Barometer further points out that In 2010, thieves stole a very wide range of merchandise, but tended to focus on expensive popular branded items including: razor blades/shaving products; cosmetics/face creams and perfumes; smart phones and electrical gadgets; alcohol; fresh meat/expensive foodstuff; electric toothbrushes, electronic monitoring devices; infant formula and coffee; DVDs and electronic games; fashion (especially branded items, leather, handbags and accessories); sports-branded goods and sports shoes; electronic goods; branded sunglasses and watches. The survey tells that over 6.2 million customer and employee thiev es were apprehended last year. Employee theft is second major component of retail shrinkage due to the huge retail space in supermarkets and big size retail organizations. Employee theft can be defined as the theft of anything of value from the retailer by an employee or accomplice. The term anything of value includes cash, merchandise, property, services and information. Employee theft occurs mostly at the checkout area followed by the sales area and the customer desk/courtesy area (Hollinger and Clark, 1983). The theft methods include stealing merchandise, stealing cash, retaining receipts to show stolen items were paid for, voiding a sale or making a no-sale after a customer has paid and pocketing the cash, overcharging, shortchanging, coupon stuffing, credits for nonexistent returns and sliding product through the lane without charging. Other examples include warehouse personnel stealing stocked items, and cleaning and maintenance personnel removing valuables with the trash. Employee theft also takes place at the point-of-receipt of merchandise and includes losses due to payment for goods not received. Employee theft is any use or misuse or stealing of employers assets by the employees without permission to do so (Justice J. Walsh, 2000). Money is the most common asset that is stolen from employers. Theft of time happens when an employee is paid for the time which he/she did not work. Usually this happens by falsifying of time records. Technically, theft of time also includes employees who are not working while on the job, although legally this is very difficult to prove. Theft of supplies is another usual form of employee theft. Examples of this form of theft are office supplies (computers, papers, cabinets, etc.) and restaurant supplies (food, silverware, condiments, etc.). Another example of theft of company property is product displays. Overcharging the customers and subsequently pocketing the extra cash can totally affect a business credibility, because it affects not only the employer but also the customers. If the customers find out that a business is overcharging, it can hu rt that business growth. This is very familiar in restaurants because many restaurants do not keep a close eye on their employees actions. Stealing information is perhaps the most damaging form of theft. Familiar examples of this nature are theft of trade secrets and product designs. A number of studies have been conducted in United States, Canada and in European countries about the employee theft in retail organizations and super markets. The US Chamber of Commerce estimates that US employers lose $20 billion to $40 billion a year due to employee theft. It also states that 30% of all business failures are caused by employee theft (David J Shaffer and Ronald A Schmidt 2006). For every dollar stolen, supermarkets need to sell at least $50 more of goods to make up the loss (George H Condon, 2003). Happy employees steal less in United States (Jennifer Korolishin 2003). Shrink losses due to employee theft can equal the profits in Canada (George H Condon 2003). 1.2 MALAYSIAN RETAIL INDUSTRY AND RETAIL SHRINKAGE Malaysias retail trade touched at RM122.54 billion for the year 2009, up 106.37 per cent from 2005. Growth has averaged 26.59 per cent yearly from 2005 to 2009. Retail sales touched RM59.38 billion during 2005, increased to RM71.69 billion during 2006, gone up to RM95.67 billion in 2007, improved to RM116.10 billion during 2008 and risen to RM122.54 billion in 2009. In the first quarter of 2010, it touched the ever seen highest amount of 32.33 billion (Department of Statistics, Malaysia). From 2006 to 2008, increased urbanization and education saw Malaysians become even more sophisticated and demanding with their shopping experiences. This brought about the development of quality, world-class malls across the country in this period, such as 1Borneo; these malls house a strong array of international brands which are uniquely suited to the discerning needs of consumers. Therefore, new lifestyle retail concepts have become more popular in Malaysia, with retailers offering unique merchan dise to cater to the needs of specific consumers. For instance, Robinsons Malaysia has 50 to 60 exclusive brands for shoppers, whilst Tangs in the Pavilion Kuala Lumpur claims to be the Generation Three Tangs store, a store that encompasses Tangs signature shopping concepts alongside being localized to meet the needs of Malaysian consumers. Store-based Retailing Achieves a Better Performance Inevitably, store-based retailing maintained its dominance from 2006 to 2008, with slightly stronger growth than non-store retailing. The development of shopping malls across the country from 2006 to 2008, especially in secondary towns, such as the opening of The Spring in Sarawak and East Coast Mall in Kuantan, further boosted the performance of store-based retailing. Direct selling continued to dominate non-store retailing, with internet retailing exhibiting the strongest current value growth, albeit from a small base. Interestingly, non-store retailer Dell also opened its first physical counter at Tec Asia in early 2008, representing an increased crossover by non-store retailers in an effort to expand their growth. Employee retail theft in select retail businesses in Malaysia during 2009-2010 The Global Retail Theft Barometer was released in October, 2010 for the period between July, 2009 and June, 2010. In Malaysia, 19 retailers with a combined sale of US$1.974 billion participated in the survey. The findings of the survey reveal that as a percentage of total sales, retail shrinkage in Malaysia was 1.53 per cent. In this, the customer theft amounts to 51.6% (US$132.10 million) This was followed by employee theft at 22.3 % (US$57.09 million) and supplier or vendor theft at 5.9% (US$15.19 million). The remaining 20.2% of financial loss amounting to US$51.71 million was due to administrative errors. As per the findings of The Global Retail Theft Barometer, the methods of employee retail theft in select Malaysian retail businesses are as follows: Table 1.1 Main methods of employee retail theft in select retail businesses in Malaysia: Cash, coupons and vouchers 18.6% Merchandise 38.3% Refund fraud, false markdown 27.3% Large financial frauds 6.9% Collusion 8.9% Total 100 Source: The Global Retail Theft Barometer, 2008 RESEARCH PROBLEM, ISSUES AND OBJECTIVES It is a difficult job to correctly approximate the amount of revenue lost through employees theft by way of cash, goods, and services because much of these activities remain undetected, unnoticed or unpublicized. It has been estimated that as much as 75% of losses attributable to employee theft is undetected because of the difficulty in separating inventory shrinkage into its major internal (theft) and external (shoplifting) component parts (Green, 1997). Like the Global Retail Theft Barometer, many other studies have also made an attempt to identify the base rate for employee theft (see Ash, 1988; Brooks and Arnold, 1989; Jones et aL, 1990; Slora, 1989; Wimbush and Dalton, 1997). The results have shown a wide-range of estimates ranging from 3 to 62 percent. Thus it could be seen that employee theft is an expensive problem for an organization; it has been reported as 10 times as costly as Americas street crime (Greenberg, 1997). The amount of property theft alone has been estimated to be $40 billion per year (Shapiro, Trevino, Victor, 1995), and about one third of employees admit that they steal from their employers (Kamp Brooks, 1991). Researches on antecedents and other correlates of employee theft have focused on two broad categories of factors: individual (personality) factors and situational factors. Both of these factors are important and have practical implications for businesses. Individual factors are variables that employers mostly cannot control; employers may only be able to respond to them. Situational factors such strong policies about theft, safeguards, etc., are much more under the control of employers. The central objective of this research is to investigate the key research problem: What are the factors contributing to workplace theft behavior of the employees of retail floor of super markets in Malaysia and how the internal control systems help to prevent/reduce the workplace theft behavior in case of the employees of Supermarkets in Malaysia. The following are the research objectives to investigate this key research problem: Objectives: a) General objective: To study the various factors contributing to the intention to steal in the supermarkets in Malaysia and also to study the relationship between the internal control systems and workplace theft behavior in the supermarkets in Malaysia. b) Specific objectives: 1) To identify the possible reasons leading to the intention to steal by the employees in supermarkets in Malaysia. 2) To find out the relationship between the individual factors and the intention to steal in supermarkets in Malaysia. 3) To find out the relationship between the organizational factors and the intention to steal in supermarkets in Malaysia. 4) To find out the relationship between the intention to steal and the workplace theft behavior of the employees of supermarkets in Malaysia. 5) To determine the moderating effects of internal control systems between the intention to steal and workplace theft behavior of the employees in supermarkets in Malaysia. 6) To identify the effective internal control systems to prevent/reduce employee theft in supermarkets in Malaysia. The research issues and related objectives to investigate the research problem are described in Table 1.2 Table 1.2 Research Issues and Objectives Research issue Research objective 1. What are the reasons contributing intention to steal by the employees in retail floor of supermarkets in Malaysia? To identify the possible reasons leading to the intention to steal by the employees in supermarkets in Malaysia. 2. What is the relationship between theindividual factors and the intention to steal in supermarkets in Malaysia? To find out the relationship between the individual factors and the intention to steal in supermarkets in Malaysia. 3. What is the relationship between theorganizational factors and the intention to steal in supermarkets in Malaysia? To find out the relationship between the organizational factors and the intention to steal in supermarkets in Malaysia. 4. What is the relationship between the intention to steal and the workplace theft behavior of the employees of supermarkets in Malaysia? To find out the relationship between the intention to steal and the workplace theft behavior of the employees of supermarkets in Malaysia. 5. What are the moderating effects of internal control systems between the intention to steal and workplace theft behavior of the employees in supermarkets in Malaysia? To determine the moderating effects of internal control systems between the intention to steal and workplace theft behavior of the employees in supermarkets in Malaysia. 6. What are the effective internal control systems to prevent/reduce employee theft in supermarkets in Malaysia? To identify the effective internal control systems to prevent/reduce employee theft in supermarkets in Malaysia. Employee theft in a retail organization can be defined as the theft of anything of value from the retailer by an employee or accomplice. The term anything of value includes cash, merchandise, property, services and information. In retail organizations employee theft occurs mostly at the checkout area followed by the sales area and the customer desk/courtesy area (Hollinger and Clark, 1983). Methods include stealing merchandise, stealing cash, retaining receipts to show stolen items were paid for, voiding a sale or making a no-sale after a customer has paid and pocketing the cash, overcharging, shortchanging, coupon stuffing, credits for nonexistent returns and sliding product through the lane without charging. Other examples include warehouse personnel stealing stocked items, and cleaning and maintenance personnel removing valuables with the trash. Employee theft also takes place at the point-of-receipt of merchandise and includes losses due to payment for goods not received. US reta ilers have recognized for years that employee theft is a huge and growing problem (Mathews, 1997). These losses were, on average, 1.72 percent of retail sales, comparable in magnitude to retail profit margins as a percentage of sales. Surveys by UKs Center for Retail Research (2001) and the Retail Council of Canada (2001) broadly corroborate these figures and demonstrate that concern about retail shrinkage is not restricted to US retailers alone. Together, with the amounts stolen, the cost of preventing theft imposes a substantial burden on retailers. Employee theft has been cited as a primary factor in 30 percent or more of all business failures (Snyder et al., 1991). Theft from retailers can result in bankruptcy or near closure. It results in lost raises and bonuses if not layoffs for employees, and higher prices for customers as the following quote argues: A store operating at 3 percent profit on sales would have to sell $1,216.66 worth of merchandise a year to make up for the da ily loss of a ten-cent candy bar. Just to cover a yearly loss of $1,000 in thefts, a retailer would have to sell each day over 900 candy bars, or 130 packs of cigarettes, or 380 cans of soup. Faced with such unreasonable selling volumes most small business people are forced instead to raise their prices and lower their ability to compete (Verril, 1999). Researchers and employers appear to agree generally on how to define employee theft. Researchers studying this phenomenon have defined employee theft broadly as an employees unauthorized taking, control, or transfer of money, goods, and/or services of an employer committed during the normal course of work activity (Merriam, 1977). Organizations create policies that fit this general definition and further identify the specific types of behavior considered to be theft in their particular context. By enacting such policies, organizations seek to shape the employee perceptions of inappropriate behavior. However, these policies often fail to generate a common perception among employees as to the types of behavior considered employee theft. While most employees agree that some types of behaviors (such as stealing cash) are theft, other types of behaviors are seen by employees as more ambiguous. For example, the unauthorized taking of food by restaurant workers would be included in the above definition of theft, but some employees may consider such stealing a perk of the job. Indeed, researchers suggest that employees are unlikely to share common definitions of employee theft (J. Greenberg, 1998; L. Greenberg Barling, 1996; J. Greenberg Scott, 1996; Hollinger Clark, 1983; Tatham, 1974). Hollinger and Clark (1983) found that several types of employee theft occur in organizations and that social norm consensus did not exist among the employees they interviewed with respect to acceptable and unacceptable (theft) behavior. Social norm consensus represents the amount of agreement among coworkers as to whether a specific type of behavior constitutes theft. This research also is consistent with Mischels (1973) work on cognitive social learning, which suggests that situations vary in the degree to which they determine and limit individuals attitudes and behavior. That is, situations with a high degree of social norm consensus serve to limit individuals to specific thoughts and actions. Social norm consensus is likely to play an important role in labeling an ob served behavior as theft. Although some theoretical work (J. Greenberg, 1998) indicates that lack of agreement among organizational members as to what is considered theft and non-theft is likely to affect whether a particular individual defines a specific incident as employee theft, this has not been empirically demonstrated. There has been some previous research on the matter of retail employee theft, although in recent times there seems to have been a dearth of interest in this topic. For example, Tatham (1974) conducted a survey of retail employees to determine their perceptions of theft from their employers. They classified the respondents into two groups: non-takers, that is, those who do not steal from their employers; and takers, those who engage in stealing. An interesting finding was that, though non-takers were less reluctant than takers to report fellow employees who engaged in stealing, in general, there was much reluctance by employees to report fellow employees who stole. Tatham also found that there was little effect of the value of the item taken on the employees admission to stealing. Hair et al., (1976) conducted a survey of some 254 retail employers to assess their perceptions of, and responses to, employee theft. They found that employers were likely to underestimate the level of emplo yee theft. As did Tatham (1974), they also found that the value of the item taken by the employees had little effect on the employees admission of stealing; however, it had a substantial influence on the employers perceptions of what constituted stealing. While Tatham (1974) found that some 50 percent of employees reported stealing from their employers, about 80 percent of retailers in the Hair et al.,(1976) study believed that employee theft accounted for less than 2 percent of their total shrinkage and that no more than 2 percent of their employees stole. Other researchers engaged in this stream of research have looked at such issues as: personnel selection and its contribution to reduction of employee theft (Brown and Pardue, 1985; Jones et al., 1990); the impact of product identification and posting of losses from shrinkage on employee theft rates (Carter et al., 1988); and the use of internal control procedures to stem employee theft (Kennish, 1985; Snyder et al., 1989). In more recent work, Oliphant and Oliphant (2001) used a behavior-based method in an effort to determine the level of shrinkage in a drug store outlet in the USA, and to assess reliability of the employers estimates of the level of shrinkage. Rather than posting shrinkage information on individual targeted items in the employee break and lunch area, the researchers posted the total dollar amount of shrinkage and the number of items missing due to shrinkage. During the eight-week period of their study, the store achieved an 82 percent decrease in the number of items stolen each week and a 74 percent decrease in monetary loss. Working in conjunction with the retail store, these researchers were able to assist with identification of and reduction in theft of store merchandise by employees. Bamfield (2004) surveyed 476 major European retailers regarding shrinkage and found variations in the shrinkage rates across countries. European retailers ranked employee theft second among the sources of shrinkage (29 percent), in contrast to the USA, where employee theft was perceived by retailers to be the leading source of shrinkage (47 percent). Though retail employee theft can take many forms (for example, giving of unauthorized discounts, theft of cash, theft of merchandise, time theft, violation of sick leave and time-off policies, and so on), the theft of cash and merchandise is most profound, and, so, is the focus of our attention. Retailers continue to struggle with this issue and continue to use a number of different policies in an effort to avert, or minimize, the problem. Among the policies are: pre-employment screening; policy and procedure manuals; loss prevention awareness programs; human resources programs, including decent retail wages and employee incentives; as w ell as various detection procedures (National Retail Security Survey, 2003). In spite of these factors, retail employee theft still continues to be the factor that contributes most to retail shrinkage in the USA. Hence, there should be focus on efforts to understand retail employee theft. The idea of employees stealing is such a difficult concept for many managers to comprehend that they do not use the words, theft or stealing, to describe the deviant actions of employees. Euphemistic or politically correct words such as inventory shrinkage, spoilage, pilferage, shortage, unaccounted loss, or defalcation are more commonly used to describe employee theft, which reflects an attitude of denial and avoids the image of criminal activity. Because an employee is considered part of the family, it is hard to accept that someone you hired and worked with would steal from you. When caught, employees are often treated less harshly than someone not employed who steals from the firm (Kennish, 1985). Many employers consider employee theft as an unpreventable, unpleasant situation which is just part of doing business (Kennish, 1985). They expect employees to steal. The problem of employee theft is further exasperated by what constitutes employee misconduct. Some employers believe a pencil here and there, use of the copier for personal use, or five dollars worth of long distance calls per month on the office phone are acceptable. When employers exhibit such an attitude, it establishes an organizational atmosphere that management condones employee theft (Kamp and Brooks, 1991). Thus, employees view stealing from the company as an acceptable and justifiable behavior. It also makes it difficult to prosecute stealing, since it is difficult to determine what level of stealing is unacceptable. Employers face the prospects of going out of-business if they cannot control the costs of lost services, cash, and products. Statistics provided by the US Chamber of Commerce indicate that 50 percent of all small business failures in the first year of business can be attributed to employee theft (Business Strategy, 1995). Insurance companies estimate one-third of all business failures can be attributed to employee theft (Miner and Capps, 1996; Snyder and Blair, 1989; Snyder et aL, 1989; Bourke, 1992). The alternative is to develop anti-theft measures (i.e. honesty tests, surveillance devices) to prevent employees from stealing which then add costs to doing business. The employer must decide which costs are greater; to catch a thief, or to accept it as the inevitable (Taylor, 1986) and pass these costs on to the consumer by raising the prices. However, to determine a cost benefit analysis, one must know the amount of employee theft being conducted. As stated earlier, it is difficult to determine the amount of business losses attributed to employee theft. For example, in the retail sector, shrinkage losses are attributed to shoplifting, employee theft, administrative error, and vendor fraud. Distinction among these categories is difficult to calculate. Most companies cannot measure the amount of employee theft accurately and the amounts that are calculated are at best, informed guesses (Baker and Westin, 1987). Robinson and Bennett (1995) used a broad category of deviant workplace behaviors within which theft may be investigated. Two dimensions of deviance, ranging from minor (m) to serious (s) and organizational (o) to interpersonal (i), can be combined to form four counterproductive behavior categories: property deviance (s, o), production deviance (m, o), political deviance (m, i), and personal aggression (s, i). In this study, they focused on the model dimensions of serious and minor incidents of organizational deviance, or production deviance and property deviance. These categories subsume specific behaviors of time theft (production deviance) and physical theft (property deviance). Property deviance includes employee behaviors that involve the unauthorized taking, control, or transfer of money or property of the formal work organization by an employee, either for the employees own use or for sale to another, during the course of occupational activity (Greenberg, 1997; Hollinger Clark, 1983b). It includes behaviors such as misuse of employee discounts; taking merchandise, supplies, or information for personal use or sale; filching money or production materials; and falsifying time records. The boundaries of employee theft as defined here do not include theft of coworker property. Production deviance includes what has been referred to as work withdrawal behavior. These behaviors can take the form of reduced productivity, increased absenteeism and tardiness, low job involvement, and low organizational commitment (Hanisch, Hulin, Roznowski, 1998). The production deviance construct also includes behaviors such as leaving work early and taking unauthorized breaks (Blau, 1998). Individuals engage in these behaviors to maximize or maintain social and organizational roles. When these motives conflict with formal job responsibilities or when employees are dissatisfied, individuals minimize time spent on formal job tasks (Hanisch Hulin, 1991). Production deviance behaviors that result in the reduction of time working (e.g. tardiness, absenteeism, abuse of sick time, unauthorized breaks, socializing, loitering) are considered to be time theft. Many researchers use attitudes such as dissatisfaction to predict deviant employee behavior (Bolin Heatherly, 2001). According to Murphy (1993), satisfied individuals tend to exhibit pro-social behaviors, whereas unsatisfied individuals tend to commit acts of property and production deviance. Hanisch and Hulins (1991) definition of work withdrawal assumes that dissatisfaction is the catalyst for behaviors such as time theft. Individuals involved in employee theft also are often involved in other deviant behaviors (Murphy). Hollinger and Clark (1983b) found relations between job dissatisfaction and property deviance among samples of retail and hospital employees, but not manufacturing employees. They also found a significant relation between job dissatisfaction and production deviance (i.e., work withdrawal or time theft) in all three industries. Differences between the strength of relation between satisfaction and property deviance and satisfaction and production deviance could occur because of perceived differences in organizational sanctions for these behaviors. Johns (1998) suggested that work context may constrain the exhibition of one withdrawal behavior while allowing the expression of another theoretically related behavior. Hanisch et al. (1998) suggested that the set of withdrawal behaviors that manifests as a result of negative job attitudes is a function of the situation and job constraints. These sanctions and constraints would be communicated by an organizations climate for theft. According to Murphy (1993), many researchers have acknowledged the importance of situational factors to employee deviance, but few have examined this relationship. Boye and Jones (1997) suggested that the effect of specific aspects of climate for theft should be examined. Climate for theft includes the opportunity to steal and the perceived and communicated norms of the organization, management, and work group. Included in these norms is the attitude toward theft, perceived extent of coworker and management theft, perceived certainty of sanctions for theft, and perceived severity of sanctions for theft. Hollinger and Clark (1983a) examined the conditions under which employees commit theft. They found that the perception of certainty and severity of organizational sanctions were related to employee theft. The perceived certainty of sanctions had a stronger relation with theft than did the perceived severity of sanctions. The least theft occurred in situations in which sanctions were p erceived as severe and certain. Greenberg (1997) suggested that norms, unwritten rules that guide behavior and contribute to an organizations climate, often condone or encourage employee theft. For example, managers who engage in theft may establish a norm that such behavior is tolerated. Managers also may encourage theft by allowing employees to use equipment and materials for personal use or rewarding extra behaviors with free or highly discounted products (Greenberg). If steal-friendly norms have been established and the organizational climate is perceived as permissive to such actions, employees may steal to fit in or get along with their coworkers. Consistent with this climate-based influence, Hollinger and Clark (1983b) found that the influence of coworker attitudes on theft behavior was stronger than that of management sanctions or employee fear of reprisal. Thus a number of studies are availa