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Published by Bok Asis, 2019-12-03 09:20:40

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COST-EFFECTIVENESS AND LOSS REPORTING
5.9 Protection Planning with an Incident Database

5.9.1 PILOT VERIFICATIONS OF THE MODEL

It is advisable to pilot test the asset protection program. This can be accomplished by
selecting some points of exposure and providing countermeasures, while leaving other
points of exposure, of equal loss probability, unprotected.

Over a controlled test period, actual losses can be tracked in the unprotected areas. For
example, careful inventories or other counts can be taken but no loss prevention efforts
employed even in the face of actual losses. The losses in the unprotected areas can then be
compared to the losses in the protected areas to gauge the effectiveness of the chosen
countermeasures. (Of course, if losses during a pilot test are unacceptably high, the test can
be narrowed or discontinued and countermeasures applied enterprise-wide immediately.)
Based on the pilot data, countermeasures should be adjusted as appropriate.

5.9.2 MODIFICATIONS OF A GROWING DATABASE

Building an incident database takes time. As incidents are entered into the system, the
incident classifications may need to be modified. Security management should be flexible in
establishing and maintaining the system but must make sure to review the data periodically.
Often, various types of incidents may be lumped together in an “other” category. If 80
percent of each month’s reports fall into the “other” category, new categories should be
developed.

To be cost-effective, an asset protection program must consider not only the major incidents
and events it is designed to prevent but also the incidental cost avoidances and asset or value
recoveries that occur in the course of operations. The reasonableness of proposed security
expenditures, compared to the losses that might otherwise occur, will move management to
approve the program. Ongoing evidence of losses avoided through security countermeasures
is necessary to sustain management support of the security program.

Cost-effectiveness reporting demands a reliable database that can be created and maintained
through an enterprise-wide loss reporting system. By using return-on-investment and other
formulas, security managers should find it easier to make the case for security expenditures.

130 Protection of Assets Ɣ Copyright © 2012 by ASIS International

COST-EFFECTIVENESS AND LOSS REPORTING
Appendix A: Model Incident Reporting Form

APPENDIX A

MODEL INCIDENT REPORTING FORM

PART I [COMPANY NAME]

1. Division 4. Date of report
2. Location 5. Reporter’s name
3. Unit or department 6. Reporter’s signature

PART II ASSET DESCRIPTION

7. Nomenclature and description 11. Ownership
(including dimensions, weight, and a) Company
color; add photo, if available) b) Other (identify)

8. Serial or other ID#
9. Monetary value
10. Basis of valuation

a) Purchase price
b) Book value
c) Replacement cost
d) Other (describe)

PART III CIRCUMSTANCES OF LOSS

12. Date and time loss discovered 16. Date and time incident occurred
(best estimate)
13. Incident type
17. Hour loss occurred (best estimate)
14. Persons involved (suspect, witness,
complainant, victim, security 18. Nature of incident (brief description
personnel) of what event occurred)

15. Location of incident 19. History of document

PART IV INSTRUCTIONS FOR COMPLETING FORM

[Here would go instructions on the number and routing of copies, the handling of file or suspense copies,
the filing period, etc.]

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COST-EFFECTIVENESS AND LOSS REPORTING
Appendix A: Model Incident Reporting Form

NOTES ON INCIDENT REPORTING FORM

Item 11. Although this item may sound obvious, it is often overlooked in incident reports. The
person completing the form should determine whether the property is really company property or
whether it belongs to a customer, the government, or another party. In cost reimbursement
contracts, when materials are purchased for use in U.S. government projects, title immediately
goes to the government, whereas in fixed-price contracts, title to materials and components
remains with the contractor until delivery of the final contracted item. The question is important
because a theft in the first example would constitute a theft of U.S. government property, a federal
crime with high sanctions, while a theft in the latter case might involve only state law with lower
sanctions. If the lost property belonged to a third party, and the company suffering the loss was
under a duty of care for such property, then the cost to the company might also include related or
consequent losses suffered by the third party.
Items 12–18. These items are of the greatest significance to security recovery and prevention
efforts. If an incident reporting system is being adopted for the first time, instructions and
examples of completed reports must be provided to employees.
Item 19. Creating a document history helps in tracking changes made to the document. Often,
information is added to reports as more data becomes available and the reports are forwarded to
others for review, comment, and follow-up. Knowing that information has been added, acted on,
or changed may be particularly important with electronic reports.

132 Protection of Assets Ɣ Copyright © 2012 by ASIS International

COST-EFFECTIVENESS AND LOSS REPORTING
Appendix B: Loss Reporting Policy

APPENDIX B

LOSS REPORTING POLICY

The preservation of company assets, both human and material, is the responsibility of every
employee of the company. This responsibility includes taking appropriate measures to prevent
losses due to willful actions that would result in personal injury, property damage, or theft. Unit
managers have the additional responsibility of facilitating the gathering of reports of losses, which
will be forwarded to the appropriate security office for tabulation or investigation.

This reporting must be timely and accurate. It provides the basis for accurate tracking of security-
related problems. Tracking facilitates analysis, helps identify weaknesses in current business
processes, and provides early notification to minimize future losses and potentially recover assets
already lost.

Reports of all crime-related losses should be made to the appropriate security office by telephone,
if urgent, or by using the Security Loss/Incident Report form.

Further guidance as to the format, scope, and areas of responsibility can be obtained through
corporate security.

GENERAL

The Security Loss/Incident Report shall be submitted for each case in which misdeeds by
individuals cause damage, loss of company property, or injury to company employees. It should
be prepared by an employee who has direct knowledge of the incident; however, in certain
circumstances, it may be completed by administrative personnel who receive spoken information
on the incident.

It is important that data on all malicious acts against the company be entered into the system. This
will permit analysis that may establish patterns and help in solving some cases. Without full and
complete reporting, the security force is at a disadvantage in preventing future offenses against the
company.

Timely reporting is also significant. Telephone reports shall be made to district and area offices as
soon as possible after discovery of every security loss/incident. The telephone report shall be
followed up by submission of the Security Loss/Incident Report form within 48 hours.

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COST-EFFECTIVENESS AND LOSS REPORTING
References

REFERENCES

Ernst & Young. (2003). Global information security survey. New York, NY: Ernst & Young.
Kitteringham, G., CPP, & McQuate, C. A., CPP. (2003, September). Many happy returns. Security

Management.
Kovacich, G. L., & Halibozek, E. P. (2006). Security metrics management. Woburn, MA: Butterworth-

Heinemann.
Toft, B., & Reynolds, S. (1999). Learning from disasters: A management approach, 2nd edition. Lei-

cester, England: Perpetuity Press.

134 Protection of Assets Ɣ Copyright © 2012 by ASIS International





CHAPTER 6

THEFT AND FRAUD PREVENTION
IN THE WORKPLACE

6.1 UNDERSTANDING THE PROBLEM

The common-law definition of theft is the dishonest appropriation of property belonging to
another with the intention of permanently depriving the owner of rightful possession or use
of it. Fraud, on the other hand, is defined as intentional deception perpetrated for the
purpose of unlawfully taking another’s property or, more simply, theft by deception. Both
offenses are considered criminal and are punished as such. In some instances, as in the case
of alleged fraud committed in the United States, victims have at their disposal both criminal
and civil remedies. Accordingly, security professionals should carefully consider their
options in designing an organization’s theft and fraud prevention program. A program that
contemplates only limited remedies offers only limited protection.

Theft and fraud are the most frequent and costly forms of dishonesty the security
professional will likely encounter. Today’s security practitioner needs to know the factors
that lead to theft and fraud, as well as the best methods of preventing it. The relevant facts or
elements of most economic crimes are motive, ability, and the opportunity to commit the
crime. Although theft and fraud are closely related and similarly motivated, the techniques
used to prevent them differ significantly. In particular, theft and fraud by employees may be
an organization’s greatest threat, second only to competition. Therefore, this document
focuses primarily on workplace theft and fraud.7

7 According to Report to the Nation 2004 from the Association of Certified Fraud Examiners, the most cost-effective way to deal

with fraud is to prevent it. An organization that has been defrauded is unlikely to recover its losses. The median recovery
among victim organizations in the study was only 20 percent of the original loss. Almost 40 percent of victims recovered
nothing at all.

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.1 Understanding the Problem

The following items offer insights into the extent of theft and fraud:
x The United States Chamber of Commerce estimates that 30 percent of business failures
result from employee theft, with over one half of them failing in the first three years of
their existence (Ferraro, 2006, p. 370).
x Occupational fraud is a growing industry in which most perpetrators are first-time
offenders (Association of Certified Fraud Examiners, 2004).
x In 2004, fraud cost each U.S. resident approximately $2,444 (Association of Certified
Fraud Examiners, 2004).8
x U.S. organizations lose 6 percent of their annual revenues to fraud. That share of the
U.S. gross domestic product would be $600 billion (KPMG, 2003).
x Small businesses suffer disproportionately larger losses than large businesses. In 2003,
the median loss suffered by small businesses was $98,000. The median loss from those
frauds committed by owners and executives was $900,000 (KPMG, 2003).
x More than 2 million shoplifter apprehensions are made every year. They are only a
fraction of the estimated 200 million annual shoplifting incidents. The estimated rate of
shoplifting translates to approximately 550,000 shoplifting incidents per day, with
losses totaling almost $30 million per day (Shoplifters Alternative, 2002).
x Various studies estimate that employees steal over a billion dollars a week from their
employers.

The following are some general observations about the characteristics of employee theft and
fraud:

x Some employees will generally steal to the extent the organization will allow.
x Clear organizational policies, procedures, and practices will significantly increase the

chances of detecting vulnerabilities and systemic gaps before losses occur.
x By reducing temptation and increasing the probability of detection, organizations can

prevent much internal theft and fraud.
x A key to preventing theft and fraud, and to increasing the reporting of suspected

incidents, is a continuous, well-developed, and well-delivered fraud awareness pro-
gram for all employees. Employees must feel confident that senior management takes
these issues seriously, will act with professionalism and discretion regarding reports
made by employees, and will steadily demonstrate their resolve to handle offenders
properly at all levels of the organization. An important prevention tool a company can
use to reduce the level of employee theft, fraud, and embezzlement is to maintain a
climate of trust, honesty, and cooperation throughout the workforce.

8 In a sense, fraud is a tax. Employee theft and fraud siphon off resources, making the victim organization less competitive.

138 Protection of Assets Ɣ Copyright © 2012 by ASIS International

THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.1 Understanding the Problem

Figure 6-1 describes the impact of theft or fraud on a company with $5 billion in revenue and
a pretax profit margin of 15 percent. Assuming the organization loses 1 percent of revenue as
a result of employee theft or fraud (a very conservative estimate for most industries), it would
need to generate an additional $333 million in sales to recover the losses.

Revenue $5,000,000,000
Losses from theft and fraud (1 percent of revenue) $50,000,000
Additional sales required ($50 million ÷ .15) $333,000,000

Figure 6-1
Financial Impact of Theft or Fraud

Thus, the loss should not be measured merely in terms of revenue. More accurately, the loss
should be measured by extrapolating the amount of sales and other costs such as downtime
and insurance rate changes necessary to cover the loss. In addition, losses avoided may be
determined by the difference between the losses estimated without a security program and
those with the program. The percentage of probable loss can be estimated for various
industries or based on the loss history of the particular organization. This method of
describing the effect of theft and fraud on profitability is a powerful tool for demonstrating
the need for comprehensive initiatives to identify and limit such losses.

In the retail industry, up to 70 percent of losses are perpetrated by employees, and for every
dollar lost to shoplifting, employees steal another $15. In the food service industry, employee
theft imposes a 4 percent tax on every customer dollar spent (Ferraro, 2006, p. 370). The
annual loss to the U.S. banking industry from employee embezzlement is estimated to
exceed $1 billion (Hart, 2004). A serious form of embezzlement in the workplace is fraudulent
cash disbursements.

Employees steal more than food and cash—they steal time. Efficiency consultants have
known this for years. Businesses have attempted to improve workplace efficiency since the
Industrial Revolution began. From Henry Ford’s first assembly line to the implementation of
modern robotics, companies have striven to improve worker efficiency.

Time theft is every employer’s nemesis. If each employee of a 200-person organization were
to steal 10 minutes a day, the employer would lose 2,000 minutes per day. If the work year
consisted of 260 workdays, the employer would have suffered a loss of 520,000 minutes, or

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.1 Understanding the Problem

the equivalent of 4.1 man-years. In effect, the workforce of 200 individuals is doing the work
of 196. If the annual wage of an employee was $30,000, the cost of each employee stealing
just 10 minutes a day translates to about $125,000 a year! Reducing wasted time by just one
minute per day per employee would create a savings of $12,500 a year (Ferraro, 2006).

The crimes of employee theft and fraud share some other general characteristics:

x They are usually perpetrated by employees with access.
x Time, finished goods, supplies, scrap and waste, and intellectual property are the assets

most often stolen.
x Lack of supervision and lack of effective processes are the primary contributors to

employee theft and fraud.
x Secretive relationships, missing documents, indicators of substance abuse, and

irregular hours of operation or building entry are clues that employee theft or fraud
may be occurring.

6.1.1 COMMON MYTHS

Employers of all sizes may succumb to the temptation of believing that theft and fraud
prevention is expensive and time-consuming. The following are among the most common
myths (often expressed as rationalizations for inaction) among employers:

x Only the needy and greedy steal.
x Good policies and procedures will catch most wrongdoers.
x Audits identify most irregularities.
x Prosecution is an effective deterrent.

Unfortunately, these assumptions are untrue and misleading. They tend to lure employers
into using quick fixes and relying on inadequate safeguards. Organizations that do so will
unnecessarily place their assets at risk and jeopardize their employees, their reputations, and
possibly their very existence.

6.1.2 MOTIVATION TO COMMIT THEFT AND FRAUD

Psychologists, sociologists, and criminologists have struggled for years to understand and
describe the motivations of dishonest individuals. Studies have sought to identify
characteristics and personality traits most often associated with theft or fraud, as well as the
social forces and environmental factors that might explain why certain individuals are
dishonest and others are not.

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.2 Employee Theft

Historically, the focus of most sociological and criminological research has been on street
crime, especially violent crime. Much study has been devoted to the psychological
composition and personality of murderers, rapists, and bank robbers over the years. More
recently, researchers have studied the minds of white-collar offenders and other dishonest
employees. After the recent corporate scandals involving Enron, Global Crossing, ImClone,
and other companies, the factors leading to executive greed and employee theft have
become even more apparent.

6.2 EMPLOYEE THEFT

Although workplace theft first received scholarly attention in the mid-19th century, academia
largely ignored the subject until the early 1980s. John Clark and Richard Hollinger (1982),
researchers from the University of Minnesota Department of Sociology, published the results
of their extensive three-year study on employee theft. They defined employee theft as “the
unauthorized taking, control, or transfer of money and/or property of the formal work
organization that is perpetrated by an employee during the course of occupational activity.”

Clark and Hollinger attempted to develop a consensus regarding the causes of employee
theft and the most effective means of deterring it. They examined employee theft in three
private-sector arenas: retailing, manufacturing, and hospitals. In doing so, they studied the
literature in criminology, sociology, psychology, anthropology, and industrial security. Their
review revealed these separate but interrelated sets of hypotheses commonly used to explain
employee theft: external economic pressures, youth and work, opportunity, job
dissatisfaction, and social control. Each is examined below:

x External economic pressures. Before the study, the most frequent justification of
employee theft was that employees steal from their employers because they have
personal problems involving alcohol, gambling, illicit affairs, or similar situations.
Clark and Hollinger observed that the connections between economic needs and the
manner in which the stolen materials satisfy those needs had not been established and
was vague at best.

x Youth and work. Another commonly expressed theory stated that younger employees
are not as honest or hardworking as people from previous generations. Two studies of
retail employees caught stealing merchandise had found that a disproportionate
number of younger, newly hired employees were involved in theft. However, no clear
and convincing evidence existed to support this theory.

x Opportunity. Security practitioners believed that the opportunity to steal items of
value was a primary factor in employee theft. It was generally held that every employee
is tempted to steal from his employer at one time or another, based on the opportunity

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.2 Employee Theft

to steal. This theory was never empirically studied until Clark and Hollinger’s later
research in 1983.
x Job dissatisfaction. The idea that job dissatisfaction causes employee theft had not
been included in most studies of workplace theft until Clark and Hollinger conducted
their study. The theory suggests that the employer causes theft because management,
directly or indirectly, is responsible for employees’ job dissatisfaction.
x Social control. The social control theory suggests that the broadly shared formal and
informal social structure within an organization greatly influences whether theft will
occur. Although not empirically tested until Clark and Hollinger’s study, the theory
emphasized the role that individual workgroup norms played in deterring workplace
theft. In addition, there was evidence in existing studies that relationships between
supervisors and employees could deter or encourage employee theft. Both theories are
similar to the deterrence doctrine, which assumes that the threat of negative social
sanctions or criminal prosecution could affect the amount of theft in the organization.
In essence, the premise holds that employees are more likely to steal if they perceive
little threat of detection or punishment.

Clark and Hollinger found it difficult to separate theft from other forms of deviance. Their
study also examined production deviance, such as unauthorized or extended coffee and
lunch breaks, inappropriate use of sick time, punching time cards for other employees, and
arrive late or leaving early. Each of those acts, by today’s standards, constitutes theft of time.

6.2.1 PREVALENCE OF EMPLOYEE THEFT

In the industries studied, approximately one-third of employees reported stealing from their
employer. In most instances, theft was minor and occurred infrequently. Model employees
did not report any theft at all. The researchers also found that employee theft exhibits a
bimodal distribution; that is, a small number of employees take large amounts of property,
while the vast majority of those who steal take only small amounts. The four characteristic
principles involved in internal thefts scams include diversion, conversion, disguise, and
divergence. The more a company can do to remove one or more of these principles, the less
likely an employee will be involved in internal theft. This finding corresponds to other
studies of community crimes, which have found that 95 percent of property crimes in a
particular community are committed by less than 5 percent of the population. The Clark and
Hollinger study also found that theft of physical assets represents only a minor share of the
employee deviance problem.

6.2.2 EXTERNAL ECONOMIC PRESSURE AND OPPORTUNITY

The study found that few people steal company property to ease economic pressures. (How-
ever, recent examinations of the subject have revealed a correlation between economic pres-

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.2 Employee Theft

sure and financial crimes committed by executives.) Aside from cashier-related embezzle-
ment and a few other types of theft, the vast majority of large-scale thefts are committed by
managers (Association of Certified Fraud Examiners, 2004). These large-scale thefts usually
fall under two classifications: embezzlement or defalcation. Embezzlement involves the
fraudulent appropriation of property by a person to whom it is entrusted, which can involve
material things such as art, property, and product, not just cash. Defalcation more
specifically deals with the misappropriation of trust funds or money held in a fiduciary
capacity (Bologna & Shaw, 1996).

6.2.3 YOUTH AND THEFT NEXUS

Younger employees (most of whom had little tenure with their employers) reported signifi-
cantly more deviance than older coworkers. Younger employees also held a higher overall
level of job dissatisfaction than more senior employees. Clark and Hollinger attributed both
findings to the employers’ habit of viewing younger or newer employees as temporary or
expendable and withholding many of the rights, fringe benefits, and privileges afforded more
tenured employees. Granting special considerations solely based on seniority may create an
atmosphere in which the youngest members are the least committed to the organization.

Though not addressed in Clark and Hollinger’s work, it is self-evident that employees with
less tenure also have less invested in their job and the organization. Although that factor may
not translate directly into individual dishonesty, a less-tenured employee will likely be more
tolerant of theft.

6.2.4 JOB DISSATISFACTION AND EFFECTS OF SOCIAL CONTROLS

Further unpacking the Clark and Hollinger study, the modern security professional will easily
conclude the following:

x Most fraud perpetrators are influenced by an opportunity to profit.

x Opportunity and theft are clearly correlated. For example, retail employees with the
greatest exposure to cash and high-value merchandise were the most likely to steal.
That propensity was particularly true of employees in occupations of lower social
status.

x However, employees at lower occupational levels do not commit most property theft.
Most such theft is committed by employees with the greatest access to the property
and least perceived chance of detection.

x In manufacturing, assembly workers tend to steal less than other employees.
However, engineers report much higher levels of theft (especially in electronics
manufacturing, where components may mean little to an assembly worker but a
great deal to engineers).

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.2 Employee Theft

x In hospitals, the majority of theft is committed by nursing staff rather than others with
the same access to various areas in the hospitals.

x The most consistent predictor of theft in all industries is the employee’s perceived
chance of being detected. Theft occurs most often when organizational sanctions or
rules against theft are not properly communicated or consistently enforced (see also
Ferraro, 2006, pp. 371-372).

x In addition, employees are greatly influenced by the informal social controls of
coworkers, such as peer group gossip, ridicule, and ostracism. Peer group sanctions
present a significant opportunity for management to reduce employee theft.

x Job dissatisfaction and theft are also correlated. Employees displeased with their
overall employment experience are most often those who seek redress by engaging in
theft and other antisocial behavior at work. Those who sense that their employer and
supervisor are concerned about their well-being do not engage in as much theft.

6.2.5 SUMMARY AND RECOMMENDATIONS OF STUDY

The study offers three cautionary notes:

x Too few organizations have appropriate mechanisms to accurately track acts of
workplace dishonesty. They are thus unable to calculate the overall economic impact
of the problem. As a result, organizations tend to generalize about their losses, and
statistically sound information is scarce. Security managers study the causes of theft to
analyze actual and potential loss-producing incidents.

x Draconian security methods, such as searching employees at workplace exits, are
expensive and hurt employee morale. By contrast, demonstrating a sincere
appreciation for the individual’s contributions to the organization instills a greater
sense of ownership and belonging. Such sentiments translate into less workplace theft
and dishonesty.

x Policies and work rules must be reasonable and fair. They must also be communicated
properly and enforced consistently. Too often, management’s expectations are scarcely
mentioned during employee orientation and never again addressed until someone is
caught stealing.

Security practitioners should focus on identifying the 5 percent of employees responsible for
the great majority (95 percent) of workplace theft. Practices that appear to punish all
employees are generally more expensive and likely to damage morale. By contrast,
anonymous incident reporting systems (sometimes called hot lines) can be used to deter
dishonest employees and empower honest ones. More occupational fraud is revealed by
anonymous tips provided by employees than by all formal internal audits combined
(Association of Certified Fraud Examiners, 2004).

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.3 Fraud and Related Crimes

In sum, loss prevention and asset protection efforts in today’s workplace should be crafted
based on the following:

x Employees who steal are frequently involved in other counterproductive workplace
activities.

x The greater the opportunity for theft, the greater the chance that it will occur.
x Employees who are satisfied with their jobs are less likely to steal.
x The greater the chance of detection, the less likely that employees will steal.
x A strong management commitment to deter theft reduces losses by employing policies

and procedures to reduce the organization’s exposure to litigation and liability.
x Theft on the job is not necessarily correlated to external factors or influences.
x Peer pressure and attitude significantly affect individual employee attitudes toward

theft (Ferraro, 2006, p. 371).

6.3 FRAUD AND RELATED CRIMES

Two prominent explanations of white-collar crime are Edwin Sutherland’s differential
association theory and Donald Cressey’s non-shareable need theory. Sutherland’s theory
states that criminal behavior is most often correlated with an individual’s association with a
criminal environment. In other words, people who frequently associate with individuals who
have criminal tendencies become criminals as a result of those relationships. His theory
posits that criminal behavior is not inherited but learned, and that it is learned through other
people by example and verbal communications. Individuals also learn incentives,
rationalizations, and attitudes associated with particular crimes. They also learn the
psychological machinations needed to commit a crime and justify it—that is, to manage the
fear of the social repercussions associated with the crimes.

By contrast, Cressy’s theory defines the problem as a violation of a position of financial trust.
He theorizes that trusted persons become trust violators when they visualize themselves as
having non-shareable financial problems and feel they can resolve the problems by violating
their position of trust. His theory is based on extensive interviews of individuals convicted of
various trust violations, particularly fraud. Cressy concludes that three elements must be
present before a fraud or similar crime can take place:

x the perception of a non-shareable problem
x an opportunity for a trust violation
x a series of rationalizations that allow the individual to justify his or her behavior as

appropriate for the situation

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6.3 Fraud and Related Crimes

6.3.1 COMMON ELEMENTS OF FRAUD

Others hold similar beliefs about the mind of the fraudster. For example, in his seminal work,
Occupational Fraud and Abuse, Joseph Wells states that three factors are present in every
fraud (Wells, 1997, p. 11):

x a strong financial pressure
x an opportunity to commit the fraud
x a means of justifying the fraud as appropriate

Unlike employee workplace theft, which often occurs spontaneously, fraud is premeditated.
Wells professes that if the three elements come together in almost any work-related
situation, a fraud will likely occur. He names several sources of financial pressures, such as
gambling debts, drug use, living beyond one’s means, and unexpected medical bills. Other
motivations include the desire to be, or appear to be, successful. However, the predominant
factor is greed.
Proving fraud tends to be difficult. The fact-finder must demonstrate the following:

x The perpetrator misrepresented or concealed a material fact.
x The perpetrator knew the representation was false.
x The perpetrator intended the victim to rely on the falsity.
x The victim relied on the misrepresentation.
x The victim was damaged by his reliance on the misrepresentation.

Fraud Symptoms and Indicators

Theft is evidenced by something’s disappearance. By contrast, most instances of fraud and
embezzlement leave only symptoms or indicators that it might have occurred. Recognizing
these indicators or red flags is important for security practitioners.

The opportunity for fraud is generally created through the absence or weakness of internal
controls. Knowledge of situational pressures and symptoms of fraud also provides the
security professional with insights for preventing frauds. The following are several categories
of such warning signs:

Employee Situational Red Flags

x high personal debts (medical, gambling, excessive speculation in the stock market, etc.)
x poor credit rating or other financial difficulties
x living beyond one’s means
x excessive use of alcohol or drugs
x perceived inequities (being passed over for promotion, receiving low pay, facing

pressure to accomplish unrealistic goals, etc.)

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6.3 Fraud and Related Crimes

x previous convictions for fraud or related trust violations
x low moral character
x compulsive behavior

Employee Opportunity Red Flags

x position of trust (which can extend significantly through the organization as a result of
employee empowerment and organizational flattening)

x significant knowledge of key operations
x easy rationalization of contradictory behavior
x close association with suppliers and contractors over a long period
x lax or remote supervision

Organization Situational Red Flags

x costs rising faster than revenues (profit squeeze)
x significantly aged or excess inventories
x extremely rapid expansion of overall business or particular lines of business
x constantly operating in a crisis mode
x unrealistic sales quotas or revenue targets
x significant cash flow problems
x history of corruption in the company’s industry
x stiff competition from other companies
x outdating of the company’s products or services
x high rate of turnover among key financial positions

Organization Opportunity Red Flags

x dominant, hierarchical, and secretive management styles
x unethical management models
x exploitation, abuse, and poor management of employees
x lack of employee training on the relationship between security and business success
x lax enforcement of internal controls
x heavy investments or losses
x line supervisors’ failure to develop an effective loss-prevention environment
x urgent need for favorable earnings
x poor accounting records
x lack of separation of responsibility for ordering and receiving
x numerous instances of related-party transactions
x complex organizational structures
x numerous unexplained or undocumented transactions
x frequent turnover among key financial personnel or outside auditors or lawyers
x lack of formal controls and mechanisms for accountability
x domination of operating and financial decisions by a single person
x failure to establish, communicate, or enforce a code of business conduct

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6.4 Scope of the Problem

6.3.2 SARBANES-OXLEY ACT

In the United States, the Sarbanes-Oxley Act (formally known as the Public Company
Accounting Reform and Investor Protection Act of 2002) became law on July 30, 2002. This
landmark legislation was passed in response to accounting scandals at public companies in
the late 1990s and first years of the 21st century. In the Enron case alone, more than $60
billion in shareholder value was lost and more than 5,000 jobs eliminated. The legislation
establishes new and enhanced accounting standards and business practices for all U.S.
public companies, their boards, and the public accounting firms that serve them. Among
other provisions, SOX (as the law is commonly called) requires CEOs to certify the accuracy
of their organization’s financial statements and imposes stiff penalties for those who commit
fraud and make material misrepresentations to the public with the intent to obtain financial
gain through false or misleading statements.

The requirement to improve internal controls and provide more transparency has not been
without cost. SOX compliance (particularly with Section 404) significantly burdens companies’
officers and boards and imposes both civil and criminal penalties on violators. Whether those
burdens are worthwhile remains to be seen, given the limited effect of internal controls on
detecting fraud and the importance of open communication and setting the tone at the top
(ACFE, 2004).

6.4 SCOPE OF THE PROBLEM

Almost anything of value may be stolen, given someone’s desire and opportunity. However,
some departments or functions in a company are much more prone to theft or fraud than
others. Figure 6-2 shows some of the more common theft and fraud targets and methods.

6.4.1 ESTABLISHING A MODEL PREVENTION PROGRAM

To prevent theft and fraud, organizations must move from a reactive to a proactive
approach. The following is the process most companies follow, usually by default, when theft
losses are identified (Albrecht, 1994, pp. 28-34):

x An incident of theft or fraud is discovered.
x Investigative resources are identified and an investigation is initiated.
x Action is taken based on the results of the investigation.
x The issue is resolved by temporarily tightening controls, replacing terminated

employees, etc.

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6.4 Scope of the Problem

Once the incident has been resolved, an organization usually slips back into a state of
acceptance, and any control procedures or processes that were implemented lose their
urgency. Should another problem occur, the organization simply follows the same model
and shifts into action to resolve that incident.

FUNCTION LOSS SCENARIO
Accounting
Theft of cash, altering bank deposits, fictitious accounts payable, unauthorized
cancellation or reduction of accounts receivable, use of company checks to pay
personal bills, false expenditures, lapping,1 kiting,2 conversion,3 and continually
restating income and expense items.

Purchasing Dummy suppliers, fictitious purchase orders, overstated prices and kickbacks from
vendors, bid rigging, personal work completed by contractors for inflated invoices,
and payment of duplicate invoices.

Payroll Ghost employees on the payroll, increasing hours paid but not worked, increasing
salaries without proper authorization, and theft of cash.

Warehousing and Theft of damaged goods, alteration or elimination of records of accountability, theft
Distribution of inventory, shipment of product to fictitious customers, falsified customer returns,
short-shipment of product, falsification of damaged goods reports, and falsification
of raw materials receipts.

Manufacturing Exaggerated breakage reports, understated manufacturing reports, diversion of
product, falsified quality assurance reports, acceptance of inferior manufacturing
materials for kickbacks, running unauthorized manufacturing shifts and diverting
product, unauthorized sale of scrap materials, and theft of tools.

Computer Operations False vendor/supplier/contractor invoices, false refund or credit claims, altered or
eliminated transactions, misdirected electronic funds transfers, and ghost
employees on the payroll.

Cashier Operations Theft of cash, diverting or eliminating cash receipts, also known as “skimming,”
and unauthorized or forged vouchers for petty cash.

Other Common Losses Inflated expense reports, submission of redeemed travel tickets for reimburse-
ment, use of higher-cost travel tickets to increase personal frequent traveler
awards, and theft of office supplies.

1. Lapping is the pocketing of small amounts from incoming invoice payments and then applying subsequent payment to cover the
missing cash from the previous invoice, and so on.

2. Kiting is any sort of fraud that involves drawing out money from a bank account that does not have sufficient funds to cover the
check.

3. Conversion is a term used for the receiving of money or property and fraudulently withholding or applying it for one’s own use.

Figure 6-2
Common Targets and Methods of Theft and Fraud

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
6.4 Scope of the Problem

A more complete model for dealing with theft and fraud is shown in Figure 6-3. This model is
based on strong collaboration among staff and key stakeholders. Such collaboration requires
a clear delineation of roles and responsibilities between security, human resources, legal,
communications (both internal and external), facilities management, and affected line
managers.

Figure 6-3
Comprehensive Model of Theft and Fraud
Prevention, Investigation, and Program Testing

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6.4 Scope of the Problem

The 10 elements of the comprehensive model are explained below.

Element 1: Prevention Programs

These programs are designed to teach management and employees about the nature, types,
and most vulnerable areas of losses in the organization. Components of prevention
education include the following:

x a process for screening all applicants for past trust violations
x written policies describing prohibited activities and the actions required if violations

are observed
x setting up shipping, receiving, and warehousing as individual departments
x specific accountability systems for each vulnerable department (presented to the

relevant department manager)
x a code of business conduct that is communicated to employees, vendors, and customers
x proper accounting practices that record all the financial transactions of the business
x a clear separation of duties that limits the accessibility to key information that would

allow an accounting individual to make changes in master files without someone
knowing it
x periodic employee communications that include case histories (free of names and
certain other details) demonstrating company vulnerabilities and management actions
against those who commit theft or fraud
x theft and fraud prevention training for employees (for example, teaching retail clerks
that they can reduce shoplifting by greeting each customer and making eye contact)
x several clearly communicated avenues for employees to report concerns (for example,
to line management, security, internal audit, or an anonymous incident reporting
system)
x frequent audits and security reviews of high-value inventory and operations

Element 2: Incident

An indicator of the effectiveness of prevention efforts is the quick and accurate reporting of
suspected thefts and fraud. Regardless of a program’s effectiveness, incidents will still occur.
The key is to ensure that incidents are reported as soon as they are suspected—perhaps with
an anonymous incident reporting system.

Element 3: Incident Reporting

Employees should be encouraged to report theft and fraud even without a monetary reward.
Fostering a culture of integrity and honesty is the best practice. The most ethical
organizations (and the most successful) regularly and passionately reward employees with
recognition and gratitude.

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Element 4: Investigation

Investigations are more successful when investigative roles and responsibilities are clearly
defined. Whether conducting an internal compliance investigation, to determine if there is a
possible violation of company policy, or an actual internal theft incident, the investigator
needs to have clear guidelines on what he or she is expected to accomplish. An investigator’s
objective is to obtain information and evidence so that it can be presented in a factual final
report so senior management can take appropriate action. The main objective of any
preliminary investigation is to determine what crime or violation exists. Under most
circumstances internal thefts and fraud investigations are conducted by in-house or private
contractors and not by law enforcement. During this investigation the investigators should
interview complainants, witnesses, and any suspects, determine whether any evidence is
available to support the allegation, and prepare a report of the facts to be presented to senior
management or in-house counsel. The investigator may also need the assistance of a
financial specialist, such as a CPA, to conduct a fraud audit so that the financial transaction
process can be reconstructed to determine how the theft occurred.

Element 5: Action

This element refers to taking action based on a fair and impartial review of the facts
determined by a thorough investigation. Taking immediate action against theft and fraud
perpetrators is one of the strongest deterrents to future losses. If employees clearly
understand that their actions may put their jobs at risk and lead to criminal prosecution,
only the most determined risk-takers will break the rules.

Element 6: Resolution

Resolution of the case may include determining the appropriate discipline for guilty employ-
ees, estimating the actual loss, reporting the loss to an insurance carrier, and performing
other steps to close the investigation and obtain a recovery. Although discipline and
prosecution can be effective deterrents, nothing makes a point like the payment of
restitution by the perpetrator. In some instances, perpetrators can be made to pay not only
restitution but also the costs associated with the investigation. Even if the perpetrator must
pay installments over a long period, recovery of the loss and the cost of the investigation is
rewarding.

Element 7: Analysis

The concern here is how and why the loss occurred—in other words, the dynamics involved
from a human and control standpoint. Keeping in mind that the most common motivation
for an individual to commit an internal theft is one of economics or profit, the analysis also
has to consider the cost-effective steps that can be taken to prevent recurrences. How much
money should be spent on prevention versus the potential loss? In major incidents or
recurring patterns of losses, human resources, internal audit, finance, and other staff
functions can play a significant role in determining how to prevent future losses. Security
professionals should also maintain files detailing the theft or fraud method for future
awareness training.

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6.5 Dangers of Undetected Theft and Fraud

Element 8: Publication

Organizations can use newsletters or bulletins to inform employees of incidents and their
resolution and show how the security organization provides value to the company. However,
naming names and publishing the details of incidents that have not been prosecuted may
constitute defamation and could be civilly actionable. A company that intends to publicize
the results of an investigation should first obtain the advice of an attorney.

Element 9: Implementation of Controls

Additional controls may prevent future thefts. For example, a company might add locking
devices on high-value inventory or require more senior authorizations for certain levels of
purchase orders. Controls must be cost-effective and based on a solid analysis of the loss.
Little is gained if new controls simply add costs or bureaucracy.

Element 10: Compliance Testing and Training

The final element consists of periodic testing or auditing for compliance with existing
controls, such as reviewing expense accounts. Such testing can be achieved through audits
(by internal or external auditors), security reviews by the company’s security department, or,
as a last resort, the use of undercover operations.

6.5 DANGERS OF UNDETECTED THEFT AND FRAUD

Financial losses due to specific incidents are not the only consequence of undetected theft
and fraud. Organizations may become complacent to ongoing losses and even build them
into their standards or expectations. For example, companies establish an allowable negative
variance between the book count and actual count of various items in stock or inventory.
Theft and fraud losses are often hidden in the negative variance and are not discovered
because they are below the allowable variance. Over time, this negative variance may grow,
presenting the opportunity for significant cumulative losses.

In addition, when thefts or frauds go undetected, the victim business cannot recover the loss
through insurance or by treating the loss as a tax deduction. Losses also affect employee
morale, shareholder value, and public confidence in an organization. Few risks have such
far-reaching consequences, yet are so preventable.

Given employees’ perceived pressures and their ability to rationalize theft and fraud, losses
from these crimes will continue to be significant. Organizations that are unprepared or have
not implemented a comprehensive theft and fraud prevention program will incur even
greater losses. Security professionals should thus give priority to the prevention of theft and
fraud in their overall loss prevention strategy.

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Appendix A: Flowcharts

APPENDIX A

FLOWCHARTS

The following flowcharts suggest controls that can be adopted to discourage dishonesty in a
variety of functional areas. They are taken from How to Reduce Embezzlement Losses (New York,
NY: Royal-Globe Insurance Company) and are used with permission.

GENERAL

A BANK DEPOSITS INCOMING FUNDS RECORD OF
FROM ALL SOURCES FUNDS
CASH
AND RECORD RECEIVED
CHECKS OF
EMPLOYEE RECONCILING
EMPLOYEE MAKING DEPOSIT DEPOSIT RECORDS AND
UP BANK DEPOSIT
DUPLICATE INCOMING FUNDS
CASH AND CHECKS DEPOSIT RECORDS
SLIP
BANK DUPLICATE
DEPOSIT SLIPS

EMPLOYEE OPENING
INCOMING MAIL

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GENERAL

B INCOMING MAIL EMPLOYEE OPENING
INCOMING MAIL
REMITTANCES
CANCELED RECORD OF RECORD OF
CHECKS REMITTANCES REMITTANCES

EMPLOYEE MAKING EMPLOYEE ACCOUNTS EMPLOYEE RECONCILING
UP BANK DEPOSIT RECONCILING RECEIVABLE DEPOSIT RECORDS AND
BANK STATEMENT DEPARTMENT
INCOMING FUNDS
RECORDS

C SECURITIES ACCESS OFFICERS HAVING PROCEEDS EMPLOYEE MAKING
ACCESS TO FROM SALE UP BANK DEPOSIT
SAFE DEPOSIT BOX SECURITIES

LIST OF LIST OF
SECURITIES SECURITIES
PURCHASED WITHDRAWN

CHECK
SIGNERS

LIST OF
SECURITIES
PURCHASED

EMPLOYEE RECONCILING EMPLOYEE MAINTAINING
BANK STATEMENT LIST OF

SECURITIES OWNED

PHYSICAL COPY OF
VERIFICATION APPROVAL OF

SALE COPY OF EMPLOYEE RECONCILING
APPROVAL DEPOSIT RECORDS AND
OFFICER
CHECKING OF SALE INCOMING FUNDS
SECURITIES RECORDS

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INCOMING FUNDS – GENERAL

A CENTRAL CASHIER AND CREDIT APPROVAL BY OFFICER

CUSTOMER CREDIT OR APPROVING
DISCOUNT OFFICER
REQUEST
APPROVAL
CASH ORIGINAL
SALES FORM
ORDER

CENTRAL COPY OF SALES
CASHIER SALES FORM CLERK

CASH COPY OF COPY OF
SALES FORM SALES FORM

EMPLOYEE MAKING EMPLOYEE RECONCILING COPY OF ACCOUNTS
UP BANK DEPOSIT DEPOSIT RECORDS AND CREDIT RECEIVABLE
SALES FORM DEPARTMENT
INCOMING FUNDS
RECORDS

See Incoming Funds Credit for questions leading to completion of credit portion of this diagram

B CENTRAL CASHIER BUT NO CREDIT APPROVAL BY OFFICER

CUSTOMER

CASH ORIGINAL ORDER
SALES FORM

CENTRAL COPY OF SALES
CASHIER SALES FORM CLERK

CASH COPY OF COPY OF
SALES FORM SALES FORM

EMPLOYEE MAKING EMPLOYEE RECONCILING COPY OF ACCOUNTS
UP BANK DEPOSIT DEPOSIT RECORDS AND CREDIT RECEIVABLE
SALES FORM DEPARTMENT
INCOMING FUNDS
RECORDS

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INCOMING FUNDS – GENERAL

C MAIL ORDERS

CUSTOMER

ORDER

EMPLOYEE OPENING
INCOMING MAIL

CUSTOMERS APPROVING
REQUEST OFFICER

FOR CREDIT WRITTEN APPROVAL
OF
RECORD OF ORDER
CREDIT REQUEST SHOWING AS

CASH OR CREDIT

CASH ORDER SHOWING
AS CASH OR CREDIT

EMPLOYEE MAKING SHIPPING ACCOUNTS EMPLOYEE RECONCILING
UP BANK DEPOSIT DEPARTMENT RECEIVABLE DEPOSIT RECORDS AND
DEPARTMENT
INCOMING FUNDS
RECORDS

See Incoming Funds Credit for questions leading to completion of credit portion of this diagram

D ADMISSIONS CASH CUSTOMER TICKET TICKET
TICKET COLLECTOR
TICKET
SELLER VOIDED
TICKET
CASH
EMPLOYEE RECONCILING
EMPLOYEE MAKING DEPOSIT RECORDS AND
UP BANK DEPOSIT
INCOMING FUNDS
RECORDS

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Appendix A: Flowcharts

INCOMING FUNDS – RETAIL

A NO CENTRAL CASHIER BUT CREDIT APPROVAL BY OFFICER

CUSTOMER CREDIT OR APPROVING
DISCOUNT OFFICER
REQUEST

SALES CASH
FORM
WRITTEN
APPROVAL

CASHIER
OR

SALES CLERK

COPIES OF
TAPES OR
SALES SLIPS

CASH

EMPLOYEE
“BLEEDING”
REGISTERS

COPIES OF
TAPES OR
SALES SLIPS

EMPLOYEE MAKING EMPLOYEE RECONCILING COPIES OF ACCOUNTS
UP BANK DEPOSIT DEPOSIT RECORDS AND CREDIT RECEIVABLE
DEPARTMENT
INCOMING FUNDS SALES SLIP
RECORDS

B NO CENTRAL CASHIER OR CREDIT APPROVAL BY OFFICER

CUSTOMER

SALES CASH
FORM

CASHIER
OR

SALES CLERK

COPIES OF
TAPES OR
SALES SLIPS

CASH

EMPLOYEE
“BLEEDING”
REGISTERS

COPIES OF
TAPES OR
SALES SLIPS

EMPLOYEE MAKING EMPLOYEE RECONCILING COPIES OF ACCOUNTS
UP BANK DEPOSIT DEPOSIT RECORDS AND CREDIT RECEIVABLE
DEPARTMENT
INCOMING FUNDS SALES SLIP
RECORDS

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Appendix A: Flowcharts

INCOMING FUNDS – CREDIT

A PAYMENT BY MAIL CUSTOMER

CREDIT REMITTANCE
REQUEST OR

APPROVING COMPLAINT
OFFICER
EMPLOYEE OPENING COMPLAINT OFFICER
WRITTEN INCOMING MAIL
APPROVAL
BILLING RECORD OF
REMITTANCE
REMITTANCE

SHIPPING DEPARTMENT RECORD ACCOUNTS RECONCILIATION EMPLOYEE RECONCILING EMPLOYEE MAKING
OR OF RECEIVABLE DEPOSIT RECORDS AND UP BANK DEPOSIT
DEPARTMENT
SALES CLERK SALE INCOMING FUNDS
RECONCILIATION RECORDS

B PAYMENT IN PERSON

PAYMENT CUSTOMER RECEIPT

EMPLOYEE ADVICE OF EMPLOYEE
RECEIVING PAYMENT COMPLETING
PAYMENT
RECEIPT
PAYMENT
COPY OF
RECEIPT

EMPLOYEE MAKING EMPLOYEE RECONCILING RECONCILIATION ACCOUNTS
UP BANK DEPOSIT DEPOSIT RECORDS AND RECEIVABLE
DEPARTMENT
INCOMING FUNDS
RECORDS

COMPLAINT AND CREDIT APPROVAL SHOULD REQUIRE SAME PROCEDURES DIAGRAMMED IN (A) ABOVE.

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Appendix A: Flowcharts

OUTGOING FUNDS – GENERAL

PURCHASING
DEPARTMENT

EVIDENCE ADVICE
OF OF

DEBT PAYMENT

CHECK EVIDENCE OF DEBT ACCOUNTS
SIGNERS ADVICE OF PAYMENT PAYABLE
DEPARTMENT
COMPLETED CHECK
AND INITIALED
EVIDENCE
EVIDENCE OF DEBT OF DEBT

CHECK EMPLOYEE
MAILING
CHECKS

EVIDENCE
OF

DEBT

PAYEE EMPLOYEE RECONCILING
CHECK BANK STATEMENT
BANK
CANCELED
CHECK

CANCELED EMPLOYEE OPENING
CHECK INCOMING MAIL

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Appendix A: Flowcharts

OUTGOING FUNDS – PAYROLL

A CASH EMPLOYEE
PREPARING
TIME CARDS OR OTHER
EMPLOYMENT RECORDS PAYROLL
LIST
LIST FOR
COPY OF APPROVAL
LIST
CHECK CHECK EMPLOYEE CHECK BANK
SIGNERS CASHING CASH
CANCELED
CHECK CHECK

CASH

EMPLOYEE
DISTRIBUTING

PAYROLL

CASH

EMPLOYEE RECONCILING ALL EMPLOYEE OPENING
BANK ACCOUNT EMPLOYEES INCOMING MAIL
STATEMENT
CANCELED
CHECK

B CHECK EMPLOYEE LIST FOR
PREPARING APPROVAL
TIME CARDS OR OTHER
EMPLOYMENT RECORDS PAYROLL
LIST

COPY OF CHECK
LIST SIGNERS

CHECKS CHECKS BANK

EMPLOYEE CANCELED
DISTRIBUTING CHECKS

PAYROLL EMPLOYEE OPENING
CHECKS INCOMING MAIL

ALL
EMPLOYEES

EMPLOYEE RECONCILING CANCELED
BANK STATEMENT CHECKS

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Appendix A: Flowcharts

OUTGOING FUNDS – PETTY CASH

PERSON TO WHOM
EXPENDITURE
IS MADE

VOUCHERS CASH
OR

RECEIPTS

EMPLOYEE AUTHORIZATION EMPLOYEE DISBURSING CASH BANK
AUTHORIZING PETTY CASH CHECK
DISBURSEMENT

COPY OF CHECK
AUTHORIZATION

RECONCILIATION REQUEST FOR
OF PETTY CASH REPLENISHMENT
WITH RECORDS
CANCELED
CHECK

EMPLOYEE CHECKING REQUEST FOR CHECK
PETTY CASH REPLENISHMENT SIGNERS

COPY OF
AUTHORIZATION

EMPLOYEE RECON-
CILING

BANK STATEMENT

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INVENTORY – PURCHASING

EMPLOYEE PURCHASE SUPPLIER
MAKING ORDER
REQUEST

REQUEST

PURCHASING
DEPARTMENT

COPY OF COPY OF MERCHANDISE
PURCHASE PURCHASE

ORDER ORDER
(Quantity Omitted)
ACCOUNTS
PAYABLE NOTIFICATION
DEPARTMENT OF RECEIPT OF
MERCHANDISE

RECEIVING
DEPARTMENT

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INVENTORY – RECEIVING

A RECEIPT OF ORDERED MERCHANDISE

PURCHASING
DEPARTMENT

COPY OF NOTIFICATION OF
PURCHASE RECEIPT OF

ORDER MERCHANDISE

RECEIVING NOTIFICATION OF ACCOUNTS PAYABLE
DEPARTMENT RECEIPT OF DEPARTMENT

MERCHANDISE

B REFUNDS CUSTOMER CHECK

MERCHANDISE COPY OF CHECK
AUTHORIZATION SIGNERS
EMPLOYEE
AUTHORIZING MERCHANDISE

REFUNDS ADVICES OF
REFUND
COPY OF
AUTHORIZATION RECEIVING
(CREDIT ONLY) DEPARTMENT

ACCOUNTS NOTIFICATION OF RECEIPT
RECEIVABLE OF MERCHANDISE
DEPARTMENT

RECONCILATION
(CREDIT ONLY)

PERPETUAL RECONCILATION EMPLOYEE RECONCILING
INVENTORY (CASH ONLY) BANK STATEMENT
PERSONNEL

C WAREHOUSE RECEIPTS - ISSUANCE

EMPLOYEE CONTROLLING REQUEST FOR EMPLOYEE ISSUING WAREHOUSE CUSTOMER
UNISSUED WAREHOUSE RECEIPT WAREHOUSE RECEIPTS RECEIPT MERCHANDISE

WAREHOUSE RECEIPTS WAREHOUSE
RECEIPT

SIGNED COPY OF REQUEST FOR
WAREHOUSE RECEIPT WAREHOUSE RECEIPT

PERPETUAL RECEIVING
INVENTORY DEPARTMENT
PERSONNEL

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INVENTORY – STOCK IN STORAGE AND WITHDRAWALS

A INVENTORY AND WITHDRAWAL PROCEDURES

EMPLOYEE COPY OF PERPETUAL
TAKING INVENTORY INVENTORY
PERSONNEL
INVENTORY
COPY OF
PHYSICAL REQUEST FOR REQUEST FOR
INVENTORY WITHDRAWAL WITHDRAWAL
PROCEDURE
REQUEST FOR ALL
INVENTORY WITHDRAWAL DEPARTMENTS
STORAGE MERCHANDISE

B WAREHOUSE RECEIPTS - REDEMPTION

OFFICER WAREHOUSE HOLDER OF
RECEIPT WAREHOUSE RECEIPT

CANCELED WRITTEN MERCHANDISE
WAREHOUSE AUTHORIZATION
INVENTORY
RECEIPT ADVICE OF STORAGE
RELEASE OF
PERPETUAL MERCHANDISE
INVENTORY
PERSONNEL

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INVENTORY – MANUFACTURED GOODS

INVENTORY EMPLOYEE INVENTORY
PROCEDURE TAKING PROCEDURE

INVENTORY

INVENTORY
PROCEDURE

DEPARTMENT FORWARDED DEPARTMENT FORWARDED DEPARTMENT
A MERCHANDISE B MERCHANDISE C

COPIES OF FORMS
SHOWING FORWARDED

MERCHANDISE

EMPLOYEE HAVING
NO ACCESS TO
INVENTORY

RECORDS OF
WITHDRAWALS, SCRAP

MATERIALS AND
INVENTORY FOR
RECONCILIATION

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INVENTORY – SHIPPING

A DELIVERIES TO CUSTOMER RETURNED
MERCHANDISE
CUSTOMER
MERCHANDISE
ORDER
MERCHANDISE DELIVERY
SALES MEDIUM
PERSONNEL
LIST OF LOADED
ORDER AND RETURNED
MERCHANDISE
SHIPPING
DEPARTMENT

RECORD OF
SHIPMENT

ACCOUNTS RECONCILIATION PERPETUAL DELIVERY
RECEIVABLE OF RECORDS INVENTORY RECEIPTS
DEPARTMENT PERSONNEL
LIST OF
INVENTORY RECORD OF RETURNED
STORAGE RECORD OF RETURNED MERCHANDISE
RETURNED MERCHANDISE
AREA RETURNED MERCHANDISE
MERCHANDISE
EMPLOYEE
CHECKING RETURNED

MERCHANDISE

B RETURNS TO SUPPLIERS RETURNED DELIVERY RETURNED SUPPLIER
MERCHANDISE MEDIUM MERCHANDISE
SHIPPING
DEPARTMENT

RECORD OF
SHIPMENT

ACCOUNTS RECONCILIATION PERPETUAL
PAYABLE INVENTORY
DEPARTMENT PERSONNEL

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OUTSIDE EMPLOYEES

A SALESMAN

CUSTOMER ORDER SALESMAN CREDIT OFFICER
PAYMENT REQUEST APPROVING

CREDIT

EMPLOYEE OPENING COPY OF COPY OF COPY OF COPY OF
INCOMING MAIL ORDER ORDER ORDER CREDIT
(CREDIT) APPROVAL

RECORD OF SHIPPING
PAYMENT DEPARTMENT

EMPLOYEE RECONCILING ACCOUNTS
DEPOSIT RECORDS AND RECEIVABLE
DEPARTMENT
INCOMING FUNDS
RECORDS

PAYMENT RECONCILIATION

EMPLOYEE MAKING
UP BANK DEPOSIT

B COLLECTOR

ACCOUNTS COLLECTIONS COLLECTOR PAYMENT EMPLOYEE MAKING
RECEIVABLE TO BE MADE UP BANK DEPOSIT
DEPARTMENT RECORD
RECORD OF OF
SPOT COLLECTIONS
CHECK COLLECTION
VERIFICATION COLLECTION PAYMENT
REQUEST
RECONCILATION
CUSTOMER

EMPLOYEE RECONCILING
DEPOSIT RECORDS AND

INCOMING FUNDS
RECORDS

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C SALESMAN - COLLECTOR - DELIVERYMAN

ADVICE OF OFFICER
CREDIT APPROVING

APPROVAL CREDIT

EMPLOYEE CHECKING LOADED S-C-D ADVICE OF
LOADED AND RETURNED MERCHANDISE CREDIT
LIST OF CASH
MERCHANDISE RETURNED APPROVAL
MERCHANDISE LOADED & RETURNED
LIST OF AND SALES FORMS ACCOUNTS
LOADED & RETURNED MERCHANDISE RECEIVABLE
PERPETUAL DEPARTMENT
MERCHANDISE INVENTORY EMPLOYEE
PERSONNEL MAKING UP BANK ADVICE OF
SALES ITEMS DELIVERED
FORMS DEPOSITS
ON CREDIT

EMPLOYEE RECONCILING
DEPOSIT AND INCOMING

FUNDS RECORDS

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
Appendix A: Flowcharts

RETAIL – MISCELLANEOUS

A COUPONS COUPONS LOCKED COUPONS EMPLOYEE
BOX COLLECTING
CASHIER COUPONS
COUPONS
RECORD OF RECORD OF
VALUE VALUE COUPONS

OF COUPONS OF COUPONS SAFE

ACCOUNTS RECONCILIATION EMPLOYEE RECONCILING
RECEIVABLE DEPOSIT RECORDS AND
DEPARTMENT
INCOMING FUNDS
RECORDS

ADVICE OF EMPLOYEE PHYSICAL
COUPONS CHECKING COUNT
ON HAND COUPONS

ADVICE OF EMPLOYEE SENDING COUPONS
COUPONS COUPONS
ON HAND
TO SUPPLIERS

B TRADING STAMPS EMPLOYEE OPENING SAFE
INCOMING MAIL
TRADING PHYSICAL
STAMPS TRADING COUNT
RECEIVING STAMPS
DEPARTMENT EMPLOYEE RECONCILING
EMPLOYEE CHECKING DEPOSIT RECORDS AND
PERPETUAL TRADING STAMPS
INVENTORY RECORD OF INCOMING FUNDS
PERSONNEL PHYSICAL RECORDS
COUNT

RECONCILIATION

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
Appendix B: 50 Honest Truths About Employee Dishonesty

APPENDIX B

50 HONEST TRUTHS ABOUT EMPLOYEE DISHONESTY

The following was developed by Steven Kirby, CFE, Kirby and Associates, and is used with
permission.

THE EMPLOYEE AND YOUR COMPANY

1. Employers can create an atmosphere that fosters honesty—or dishonesty—by the way
they conduct business.

2. If you ask an employee to steal for you, don’t be surprised when he steals from you.
3. Theft is the ultimate sign of employee disrespect towards you and your organization.

That disrespect is usually predictable, based upon prior behavior.
4. Employees involved in theft have usually been involved in other prior misconduct at the

company.
5. Employee theft is far more costly to the organization than just the value of the goods

stolen.
6. The employee who steals is more insidious than the outsider because that employee

violated your trust.
7. No employee who steals is a “good employee”—no matter how hard he or she otherwise

works.
8. Tenure is not an insurance against theft.

PSYCHOLOGY OF EMPLOYEE THEFT

9. Need and opportunity are critical elements for theft to occur.
10. Need can be very superficial and at times difficult to understand.
11. An employee’s ethical makeup will temper the temptation to steal.
12. Virtually every employee who steals has rationalized his or her dishonesty.
13. Most employees wouldn’t steal if they couldn’t rationalize.
14. Employees who steal believe that everyone steals and that most steal more than they do,

no matter how much they have actually stolen.

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Appendix B: 50 Honest Truths About Employee Dishonesty

15. Employees who steal from you do not consider themselves dishonest. They prefer to
think you are somehow responsible.

16. A thief learns to lie before he learns to steal.

TOLERANCE OF THEFT

17. No theft, no matter how minor, should be tolerated or ignored.
18. Theft is like a cancer—if left untreated it will continue to grow and spread.
19. Employees who know of unreported theft are as bad as the thief.
20. Very unfortunately, most employees mistake kindness for weakness.
21. Most employees appreciate a second chance—to steal from you again.

DETECTION AND PREVENTION

22. No one ever gets caught the first time.
23. The employee who is closest to the loss (that is the one with the most access) is usually

the one who did it.
24. Be careful of the employee who discovered the loss.
25. When the person’s explanation sounds suspicious, be suspicious.
26. Your so-called sixth sense is usually pretty accurate (it’s actually a consolidation of all

your senses), so trust it.
27. Employees who deny guilt, but are willing to make restitution, are guilty.
28. When a number of employees suspect one person, there’s usually a pretty good reason.

CONTROLS OVER THEFT

29. Virtually every theft or fraud could have been prevented by better management.
30. Nothing you own is immune from theft, and no business is theft- or fraud-proof.
31. Most businesses are loath to install controls to prevent theft and fraud; the failure to do

so is itself a result of rationalization and denial.
32. For some reason, companies are more eager to detect theft after the fact than to prevent

it from happening, even though it is much cheaper to prevent it in the first place.

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
Appendix B: 50 Honest Truths About Employee Dishonesty

33. The best way to avoid employee theft is not to hire a thief.
34. The best way not to hire a thief is to investigate a potential employee’s background.
35. If a person has stolen from a previous employer, is it reasonable thinking he won’t steal

from you?
36. Constant and eclectic vigilance is required to prevent theft; there is no silver bullet.
37. Isolating the responsibility is a critical theft prevention concept.
38. Never let an employee be his or her own check and balance.
39. Asset protection is in everyone’s job description.
40. Effective security measures are not oppressive or burdensome. They go with the flow of

operation.
41. Asset protection is an insurance. The cost should be weighed against the risk.

CRIME AND PUNISHMENT

42. There is no perfect resolution. Each case must be considered independently for the most
just and intelligent disposition.

43. You cannot rely on the criminal justice system to protect your assets, investigate theft, or
bring the culprit to justice.

44. The deterrent effect of any punishment is far shorter than you can imagine.
45. If you want to understand the physics of a black hole, bring your employee theft or fraud

case to the typical big city court.
46. The employee who says he is sorry usually is—sorry to have been caught.
47. The employee who is remorseful today will be spiteful tomorrow.
48. If the only punishment the employee receives is termination, the proceeds of his theft are

his golden parachute.
49. If the dishonest employee offers to resign, accept it and avoid the urge to be vindictive.
50. Of the three “shuns” (termination, prosecution, and restitution), restitution, while the

most difficult, does the victim the most good.

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THEFT AND FRAUD PREVENTION IN THE WORKPLACE
References/Additional Reading

REFERENCES

Albrecht. W. S., McDermott, E. A., & Williams, T. L. (1994, February). How companies can reduce
the cost of fraud. The Internal Auditor, pp. 28–34.

Association of Certified Fraud Examiners. (2004). Report to the Nation 2004. Available: http://
www.acfe.com/documents/2004RttN.pdf [2006, October 17].

Bologna, J., & Shaw, P. (1996). Corporate crime investigation. Boston: Butterworth-Heinemann.

Hollinger, R. C., & Clark, J. P. (1982). Formal and social controls of employee deviance. Sociological
Quarterly, 23, 333–343.

Ferraro, E. F. (2006). Investigations in the workplace. New York, NY: Auerbach Publications.

KPMG International. (2003). KPMG forensic fraud survey 2003. Available: http://www.kpmg.com/
aci/surveys.asp#fraud03 (2006, January 12].

Hart, K. M. (2004). Employee theft. Posted on New Jersey Law Blog. Available: http://www.
njlawblog.com/corporate-investigations-white-collar-employee-theft.html [2006, September 12].

Shoplifters Alternative. (2002). 2002 shoplifters survey. Jericho, NY: National Association for
Shoplifting Prevention.

Wells, J. T. (1997). Occupational fraud and abuse. Austin, TX: Obsidian Publishing.

ADDITIONAL READING

Albrecht, W. S., Romney, M. B., Cherrington, D. J., et al. (1982). How to detect and prevent business
fraud. Englewood Cliffs, NJ: Prentice-Hall.

Albrecht, W. S., Wernz, G., & Williams, T. L. (1995). Fraud: Bringing light to the dark side of
business. Burr Ridge, IL: Irwin Professional Publishing Co.

Bettencourt, K. C. (1990). Theft and drugs in the workplace. Saratoga, CA: R&E Publishers.
Fennelly, L. J. (1996). Handbook of loss prevention and crime prevention (3rd ed.). Woburn, MA:

Butterworth-Heinemann.

Ferraro, E. F. (2000). Undercover investigations in the workplace. Woburn, MA: Butterworth-
Heinemann.

Fischer, R. J., & Green, G. (1998). Introduction to security (6th ed.). Woburn, MA: Butterworth-
Heinemann.

174 Protection of Assets Ɣ Copyright © 2012 by ASIS International

THEFT AND FRAUD PREVENTION IN THE WORKPLACE
References/Additional Reading

Green, G. S. (1996). Occupational crime. Chicago: Burnham, Inc.

Healy, R., & Walsh, T. J. (1981). Principles of security management. New Rochelle, NY: Professional
Publications.

Rusting, R. R. (1987). Theft in hospitals and nursing homes (2nd ed.). Port Washington, NY: Rusting
Publications.

Snyder, N. H., Broome, O. W., Kehoe, W. J., Mcintyre, J. T., Jr., & Blair, K. E. (1991). Reducing
employee theft. New York, NY: Quorum Books.

Protection of Assets Ɣ Copyright © 2012 by ASIS International 175



CHAPTER 7

PRIVATE POLICING IN
PUBLIC ENVIRONMENTS

7.1 INTRODUCTION

This chapter examines private security operations in the public realm. Specifically, that
realm includes streets, municipal parks, business districts, residential communities, and
other areas frequented by the public without any meaningful access restrictions. The public
realm also includes critical infrastructures. The areas discussed are also routinely patrolled
by municipal police departments. Private policing in public environments raises a number of
important considerations, including political, operational, legal, ethical, and societal
implications.

A few caveats are in order:

x First, this work in no way advocates the elimination, or even the diminishment, of
public policing agencies. Indeed, it illustrates that the expansion of security personnel
into the public realm is due to forces outside the control of policing agencies. The
growth of private police is not a reflection of poor public policing.

x Second, the use of private police is designed to supplement already overworked, and
often understaffed, law enforcement agencies. The work of public and private police
should be viewed as a division of labor.

x Third, private policing has certain market-based benefits compared to government-
based policing. The widespread introduction of private police serves the interests of
more highly trained law enforcement officers, as well as the community—or the
client—they serve.

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PRIVATE POLICING IN PUBLIC ENVIRONMENTS
7.1 Introduction

A way to conceptualize this arrangement is to view it in light of other professions. Perhaps
three decades ago, the introduction of paralegals and paramedics created controversy in
their respective professions. The legal bar worried about lowering the value of the licensed
attorney. Doctors worried about the quality of medical services their clients would receive
from medical paraprofessionals. Today, however, the importance of paraprofessionals in
those fields is self-evident. In this sense, private police can be considered “para-police”
(McLeod, 2002).

As security professionals know, the provision of security and public safety services is not the
exclusive domain of government. Indeed, the majority of persons charged with security and
public safety services are employed by private firms. Of course, this does not minimize the
substantial role that public police officers contribute to public safety. The point is that
security and public safety are not exclusive to government.

Though commonly accepted within the security profession, the introduction of private
police into the public domain may cause some people concern or even alarm. This is
understandable, particularly in Western countries. Most contemporary observers view police
agencies as “normal,” as if their use was the natural state of law enforcement. It is not. Public
policing is a rather new phenomenon. When the first police department was organized by Sir
Robert Peel in London in 1829, many people viewed that change with concern or alarm. The
introduction of private policing can be viewed as going back to the future, in which private
citizens contribute more time and effort to the safety and security of their communities.

7.1.1 HISTORICAL PERSPECTIVES

The history of policing can be summarized in terms of one overriding human need: survival.
The security of the individual, the family, the community, and the nation state are all tied to
this basic need. Indeed, in his famous hierarchy of needs, Abraham Maslow classifies
security as a second tier need, just above food, clothing, and shelter (Robbins, 2003; Pastor,
2006). Given the importance of security, it is understandable that people have developed
various mechanisms to gain it.

For centuries, people in the community acted as “security” within the community. The job
of security was not even a job. There was no police department to call. Instead, it was the
duty of all able-bodied men to protect their homes and their community (Pastor, 2003).
Thus, the people acted in self-defense or in defense of their community. Viewed in this
manner, security has historically been the province of the people. This assertion was even
reflected in one of Peel’s guiding principles: the people are the police, the police are the
people (Oliver, 2004; Pastor, 2006).

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PRIVATE POLICING IN PUBLIC ENVIRONMENTS
7.1 Introduction

Before the formation of public policing agencies, self-help and self-protection were
considered the foundations of law enforcement and public order (Pastor, 2003; Nemeth,
1989; Shearing & Stenning, 1983). Kings were primarily concerned with conducting warfare,
not enforcing domestic tranquility. That arrangement changed when the enforcement of the
law—or, in broader terms, the justice process—was seen as a cash cow (Pastor, 2003;
Reynolds, 1994; Benson, 1990). This realization facilitated the expansion of government’s
role into the internal justice process through the expansion of the king’s peace. The king’s
peace, in essence, equated to law and order (Pastor, 2006).

As the power of the king evolved, many offenses previously regarded as intentional torts
(wrongs subject to civil tort law) became crimes against the king’s peace (Pastor, 2003;
Johnston, 1992). The change from a tort-centered to a crime-centered system inevitably
affected people who were to be compensated for the injury caused by the act (i.e., tort or
crime). Often victims desired crimes to be viewed as civil torts so they could collect financial
compensation (Pastor, 2003). Conversely, the king had an incentive to declare an act a crime
in order to derive a financial benefit. If the act was declared a crime, the king could
confiscate the criminal’s property and inflict corporal or capital punishment (Johnston,
1992). With these incentives, over time arson, robbery, murder, and other felonious and
violent actions were declared to be crimes (Reynolds, 1994).

The ever-increasing expansion of the criminal law was not without justification. Some
believed it would reduce retribution by private citizens, as well as provide legitimate
sanctions by the government (Pastor, 2003; Nemeth, 1989; Benson, 1990). State sanctioning
of criminals removed the need for the victim (or his or her family) to retaliate against the
offender. Instead, the state (or king) would avenge the harm done to the victim on behalf of
all the people. In return, crime prevention and control was also transferred to the king.
Many citizens were happy to transfer this duty because the costs, resources, and efforts
previously devoted to crime prevention and control would also transfer to the king (Pastor,
2003; Reynolds, 1994).

Notwithstanding this gradual transfer of retributive authority to the throne, the burden of
law and order rested on the citizenry for a large part of recorded history. To accomplish
crime control, towns were protected by citizens through the use of the “hue and cry”
(Pastor, 2003; Nemeth, 1989). Hue and cry was a call to order. When a hue and cry went
out, able-bodied men would lend assistance against criminals or criminal acts. This
ancient system of crime protection is remarkably similar to the “observe and report”
function of private security, absent the pursuit and capture of the criminal (Pastor, 2003).
The underlying purpose of observing and reporting is that the security officer should act as
a deterrent to crime. If a crime is observed, the security officer should gather information
about the criminal and the crime and then immediately report such to the public police.
This is deemed as being the eyes and ears of the police (Pastor, 2003).

Protection of Assets Ɣ Copyright © 2012 by ASIS International 179


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