Auditing 101 Thwarting Employee Theft

Posted by Poppy Behrens on Oct 9, 2017 12:00:00 AM

It is important for storage owners and supervisors to understand not only what is being stolen but what motivates people to embezzle. This will allow the owner to implement appropriate preventive and detective measures. Keep in mind that many employees who steal from an employer are first-time offenders. There are two separate, but related, theories about why employees commit fraud. A study from researchers Hollinger and Clark of 12,000 employees in the workforce found that nearly 90 percent engaged in “workplace deviance,” which included behavior such as goldbricking (doing less work that one is able to do), sick time abuses, and pilferage. And, a shocking one-third of employees actually had stolen money or merchandise on the job. As a self-storage auditor and consultant, I believe that all employees steal something. This would include:

• Money • Merchandise
• Time • Supplies

Theory #1
This study concluded that the most common reason employees committed theft had little to do with opportunity and more with motivation. The more dissatisfied the employee was at their workplace (or in life), the more likely he or she was to engage in criminal behavior. If the employee believes that they are not being fairly treated or adequately compensated, statistically we are at much higher risk of trying to get even.

Theory #2
A second theory about why employees steal is related to financial burdens. Criminologist Donald R. Cressey interviewed nearly 200 incarcerated embezzlers, including convicted executives. He found the great majority committed fraud to meet their financial obligations. Cressey
observed that two other factors had to be present for employees to commit fraud: They must perceive an opportunity to commit and conceal their crimes and be able to rationalize their offenses as something other than criminal activity.

Storage Business Is Vulnerable
The storage business is more vulnerable to theft because we have very few people working at the store. In addition, we tend to get a fair amount of cash payments, and most storage operators don’t have enough internal controls over employees. Many owners typically aren’t well versed in using the management software, which makes them more vulnerable to theft.

Danger Signs Of Theft And Embezzlement
Since we have very few employees operating the storage property and they have very little supervision, it is even easier for employees to steal. Here are the most common signs that embezzlement may be occurring at your self-storage property:

• Employees who never want to take a vacation. The employee doesn’t want to have anyone else at the store to see what is going on with the computer, physical inventory, or their “special” customers.

• Managers who cannot seem to keep assistant/relief employees. As an owner or supervisor, you should have an open line of communication with all employees. Relief employees may tell you about problems or issues if something doesn’t seem to be right at the property.
• Inadequately trained relief personnel. In embezzlement situations, relief employees typically don’t make deposits, call delinquent customers, and/or conduct weekly inventory of the storage spaces.

• Employees who tell the customers that they are the owner of the facility. This may sound strange, but when an employee wants a complaining customer to go away and not cause any attention or problem with the real owner they simply say that they are the owner. It is important to have a way for customers to call your home office to receive complaints. Years ago, Hideaway Self Storage in Florida had a sign on the front door of each property that said, “If you are happy with us, tell a friend; if not, call (the home office number).” This keeps a line of communication open between upper management and the customer.

• A change in the employee’s lifestyle. Watch out for changes in the way the employees live and their buying and spending habits.

• A change in the employee’s behavior. Over the years, I have discovered employees who have had a missing child, were readying themselves to leave their spouse, medical issues, and IRS problems that have put stress on their personal finances; they had chosen to make up the money from the funds at the property. It is imperative that you spend time at the storage property to watch their interactions with customers and see that they are following all of the company policies and procedures.

• Employees who never complain. Most employees have some complaints about the property, pay, petty cash being slow, etc. We have noticed that many embezzlers don’t complain because they know that behavior will only bring more attention and disrupt their system of embezzlement.

• Low cash deposits. As an owner or property manager, it is a good idea to trend the monthly cash payments and income at the property. If the cash payments change dramatically, you may have a theft problem.

• Delays in making timely deposits. Deposits should be made daily, and they should go in the order that they occurred. On a weekly basis, you should be tracking the daily deposits and when they are actually deposited into the bank. We ask our managers to scan in their daily close information from the computer, detailed deposit slip, and bank receipt. And, a deposit from Wednesday should not be deposited before the Monday deposit. The employee may have used the cash from Monday’s deposit, so it wasn’t deposited in a timely manner.

• Depositing errors. Check each month’s bank statement carefully for any deposit corrections. Match the cash and check totals with the bank deposit slip with the daily close from the management software.

• Overage or underage in the daily cash drawer counts. Check the petty cash and cash drawer when you are at the property. In my experience, most embezzlement begins with petty cash. Each receipt should be carefully reviewed. If you find something out of the ordinary or personal on the receipt, you should call the employee immediately. Savvy employees will test to see if anyone is actually watching the petty cash receipts by
purchasing something small (e.g., ice cream, gum, dog food, etc.).

• Employees who do not move a customer out of the computer when the customer actually vacates the space. This is a way that an employee can take a credit in the computer and either use it for that space (new rental, just a name change in the computer) or transfer the credit to another space. Rent credits are now the most common form of embezzlement, and they are difficult to track since employees need to give credits for a variety of reasons.

• Employees who are too eager to hold auctions or never want to have an auction. Basically, these embezzlers are taking money from those customers who are often required to pay in cash.

• A disorganized office has been a common means for employees to hide the embezzlement. They may just excuse missing contracts, mystery spaces, or petty cash problems as errors because they are so busy, under staffed, or their relief managers aren’t doing their job.

• Personal problems such as suspicion of marital discord, gambling addictions, or dependents living with them.
• Suspicious and unexplained break-ins. Several of my former employees have been found breaking into our customers’ storage spaces. In one case, a different customer gate code was being used to get into the gate during early morning hours. This fact led me to believe that the thief was someone who had access to our management software. A site stakeout led to their demise.

• Employees who fail to overlock delinquent tenants. When employees fail to overlock, they may be using the delinquent customer’s cash payment until they find another customer who is paying the same amount or a credit they can transfer into the delinquent customer’s account.

• The use of generic manual receipt books in the office and any missing carbon copies in manual receipt books. Cash receipts should be checked to see if they were recorded in the self-storage management software.

• Use of both a computer and a manual bookkeeping system at the property. This is a dangerous practice. It is too easy for employees to give a receipt for cash and not enter it into the management software.

All theft is a combination of motive and opportunity. The opportunity to commit fraud is typically addressed through internal controls, which are your policies and procedures. The handling of cash, checks, and credits given in the software should have specific policies (i.e., a written policy and procedure manual). If you set up appropriate checks and balances, it becomes more difficult, but not impossible, to defraud the company.
There are also times and situations when companies become more vulnerable to theft:

• Tax time (April)

• Christmas
• Employees with personal problems (e.g., IRS, gambling,

• Employee vacations

• Change in ownership(e.g., IRS, gambling,

• Post audit divorce)

To deter an employee’s opportunity to steal, you should divide certain responsibilities. The employee should be limited in their ability to use credits in the management software. Customer credits can easily allow the employee to use many excuses for what is actually data manipulation for the purpose of embezzlement. A form for all credits and adjustments should be used to explain the adjustment, and it must be signed by the customer and employee (e.g., late fees waived, move-in specials, etc.). In addition, all credits and cash payments should have a receipt (filed in the customer’s folder) for all cash, credits, and credit card transactions. The owner or supervisor who is not at the property should be the one who gives credits to the customer’s account. This may seem cumbersome, however it is necessary to have reasonable assurance of internal control of the most common means of theft in self-storage.

Since most storage properties have cameras throughout the property, it is a good idea to have at least one camera in the office over the desk area. Digital video recorders are enormously important pieces of equipment to be able to retrieve critical evidence of theft. In addition, hiring
mystery shoppers to purchase items at the store with cash is another good way to determine if your employees are selling effectively and putting the money in the
daily deposit.

Treat Employees Fairly
Research into why typically good employees turn to theft can be summarized by understanding that when employees feel unfairly treated they believe they are justified by making things right or fair by getting their compensation another way. Self-storage employees generally get very little training and are left to run the business with little direction. The more you lead and supervise your team, the less likely they are to embezzle.

Financial Problems
Employees who are faced with embarrassing financial difficulties are a substantial problem. Typically, they are
desperate for money and they don’t want people knowing how bad a situation has become. The deception can include their co-workers, friends, spouse, or any other relatives who would swear the person has no money problems. So, when the auditor is looking at the books, they should look for signs from the employee that they are financially burdened.