Employee Theft and its Impact on Retailers

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Summary

Even though the end of the economic downturn is imminent, the scars it has created have not completely healed yet, and many have turned to illegal acts such as shoplifting to escape their difficult financial situation. In particular, retail losses due to shrink has reached $40.5 billion in 2006, of which 47% was caused by employee theft, according to the National Retail Security Survey. Although the loss of expensive items in the inventory are likely recorded, it may take a business a long period of time to detect the losses of an inexpensive item. Retail shrinkage can be caused by inventory losses from employee theft, shoplifting, organized retail crime, administrative error, and vendor fraud.

Connection

In Chapter 11, we learned that a physical inventory is taken to determine the value of the inventory currently in stock. Subtracting that amount from the beginning inventory and the cost of merchandise purchased gives the cost of goods sold. However, when shrinkage occurs, the physical inventory count and the count recorded in the company’s financial records would show a discrepancy. As a result, the merchandise is no longer on hand but stolen, lost, or broken and would be categorized as “cost of goods sold”, even though the sales revenue would not increase, resulting in a lower gross profit. Had the merchandise not been stolen, the amount of the gross profit would be higher due to the increase of sales, since the amount of ending inventory is the same in both cases.

Reflection

Although a child stealing a chocolate bar may not seem like a huge, small discrepancies could add up and employee theft and shoplifting should be prevented. Often we overlook how easy it is for employee theft to occur since they are in charge of processing the transaction and it is convenient to purposely undercharge a customer by not scanning an item. As well, many consumers may accidentally shoplift by forgetting to put small items from the bottom of their cart onto the conveyor belts. Unlike in other places where the consumer pays for the breakage, here the business is responsible for covering the cost of replacing the item. Unless security is added to reduce inventory losses, the reality of retail shrinkage would remain a burden for many businesses.