David R. Henderson  

Employee Theft

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I was reminiscing today with a friend about jobs we had when we were in high school and college. We had both worked in a kitchen for a big restaurant--he in Philadelphia and I at a resort in Minaki, Ontario where my cottage is.

We both saw that there was little slack in either kitchen we worked in--among cooks, busboys, waitresses, dishwashing machine operators (I was the latter and so was he), etc. It would have been very easy to catch someone slacking off. Productivity was relatively easy to observe.

But what got us talking about that was a cable TV show that my wife and I have been enjoying: Mystery Diners. It's on Food Network.

The typical set-up in the half-hour show is this: Someone--almost always the owner of the restaurant--comes to the main guy because he's concerned that his business has dropped off. Given how much liquor is used, he's not getting the revenue he's used to. Or certain regular customers aren't showing up as much. Or, in one case, that of an art gallery, the caterer is suddenly charging 20 to 30 percent more (he says he charges based on food eaten and wine consumed) even though the number of patrons at the art gallery events has not increased.

So the guy and his staff start their process. One of his people investigates the background of key employees. Another shows up looking for a job as a waiter or waitress. Another shows up as a customer. Etc. They also set up cameras everywhere so that they can keep an eye on what happens. Then they invite the owner to sit with them and watch the drama unfold. Virtually always there's employee theft. (Of course, they probably aren't showing the ones where they can't figure it out or where there's simply bad management.) The thieves are brazen. And when they are confronted, they get incredibly self-righteous: I was doing it for you, I saw that your business was failing and I tried to turn it around. (Never mind that I was pocketing $20 per customer that you were never seeing and handing out free liquor.)

In one episode we saw recently, the manager was putting out on social media notices of raves at a steak restaurant that served an older steady clientele. The people were told to come and ask for him. They paid their $20 and were led out to a patio where there was loud music and they could drink all they wanted. The owner had cameras that fed to his cell phone, but what he didn't plan on is that the manager brought in a techie who set up the computer so that the feed from the patio was not of the real-time events but was from an old tape showing the patio with people quietly eating their meals.

It reminded me of a mutual friend of ours named Harry. We were all in the Ph.D. program together at UCLA. I had met Harry at the University of Western Ontario and we had driven down from Canada together and been roommates for the first 2 years. When I had met Harry, he had come off a year leave-of-absence as an undergrad at UWO to buy and run a Sunoco gasoline station. The station had been phenomenally successful. I think I recall Harry telling me that Sunoco said it was one of the most, if not the most, successful Sunoco stations in southern Ontario, which, of course, is where over 80% of Ontario's population lived. Harry told me that after that year, Sunoco asked him if they could hire him to write a manual telling how to run a gasoline station successfully. Harry turned them down, pointing out that the manual would be very brief. In fact, it would be four words: "Guard against employee theft." And the main way to do that circa 1970, before the era of cheap cameras and video feeds, was to be there. There was not a good substitute.

I had asked Harry at the time how employees stole. He answered that they would give oil and other merchandise to their friends. That reminds me of a blog post that former guest blogger Garett Jones wrote on this site. Here's the key segment:

I had a friend in high school who got a job working at a frozen yogurt shop precisely because he was unpopular: The owner was tired of losing inventory every time the cool kids came by.


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COMMENTS (10 to date)
Tom West writes:

I remember being utterly shocked as a naive 18 year old the first time I heard someone say "I am not being paid enough to care" to a customer.

But then, if you're earning minimum wage in a boring job with no meaningful opportunity for advancement, there's not a lot to lose.

A not insignificant number of people in this situation will change jobs every few months just out of boredom. Being pushed out for just not giving a hoot just means finding the next job a few weeks early.

(Needless to say, all the individuals who I met who did so were white and spoke English as a first language. Most weren't unemployed for longer than a day after their UI and savings ran out.)

david writes:

Do be warned that Mystery Diners is dubiously 'real' TV; there are accusations of it being scripted floating about.

The Association of Certified Fraud Examiners (who have an obvious interest in hyping up fraud, so do take with a pinch of salt) claim that their surveys show that 'misappropriation' (i.e., theft), although the most common form of employee fraud, is also the least costly. Corruption in business transactions, or fraudulent financial reporting, are less frequent but phenomenally costly.

Surprisingly, fraud by executives is only 40% as frequent as fraud as employees but 9x times more costly; managers sit in between. This does imply that executives (presumably defrauding shareholders) generate 'more' losses than employees on net.

Michael Stack writes:

Employee theft is a fascinating topic, I'd like to share a few thoughts/impressions:

1. I was at Cedar Point (a popular amusement park in the US) recently and my kids wanted to play one of the carnival games (for example, throw a ball into a small hole to win a prize). I noticed that the very first thing the employee did was to pull a very visible chain N times, where N was the number of balls we'd purchased. I'm assuming this is to prevent employees from not recording the sale.

2. Most restaurants I worked in while younger had very strict liquor control. Typically only the manager was allowed to restock liquor, and was responsible for very tight inventory control (even counting to within 10% the contents of open bottles each night).

3. When I worked at Olive Garden, they would audit your tables and if you had sodas on the table that hadn't been put on the ticket, you could lose your job. Sodas had to be rung onto the ticket before they could be served.

4. My friend was a regional manager for a popular gas station chain in the US, and he told me that employee theft was his biggest problem. With modern technology, he is able to view any transaction and see a video showing the employee's actions during the transaction. Most fraud took the form of returns - the employee would 'return' an item that hadn't been returned. If the employee would keep the number of returns low, it would likely go unnoticed. Frequently though the employees would get increasingly greedy, and the return variance would be high enough to attract my friend's attention. I wondered about the situation where an employee was able to steal for years by keeping the return volume low, but my friend was insistent that it wasn't an issue. I'm not sure how he knew that.

_nl writes:

Several of those shows are scripted or otherwise not genuine. If you Google around, the people who work the restaurants often claim it's fake and local actors will claim to have answered trade ads to portray someone, often the heel.

Bostonian writes:

I wonder if work histories will become available in an automated way in the same way credit histories are. Then people who are getting fired every 6 months or 1 year will have a tougher time getting even low-paid jobs. People who work for several years at a low-paid job will seem more reliable to other employers.

People now list job histories on their resumes, but if employers want to verify the job history, they must do so manually, I believe.

David R. Henderson writes:

@_nl,
Thanks for noting that big caveat about this show.
@Michael Stack,
Interesting stories. Thanks.

Glen Smith writes:

Employee fraud in my experience has usually been associated with business fraud. My guess is that it is easier for the employee to justify fraudulent behavior on his/her part when the business is behaving fraudulently. I would also add that most significant employee fraud I've come across seems to occur at the higher levels.

Michael Stack writes:

@Glen,

I think that 'significant' fraud almost always occurs higher levels, as that is where folks have a real opportunity to commit that type of fraud.

That said, I think low-level employee fraud is way more common, albeit less 'significant', at least on a per-incident basis.

Yaakov writes:

In Israel we had some nice stories of employee theft. One of the biggest ones involved a bank worker who stole out the entire bank, over $50 million. She gave the money to her brother who was gambling with it.

Another story involved the finance minister. He was the head of some political organization. When two of the top workers decided that since the organization is not really doing anything they may as well clear it out, they started sending him payments of about $8000 a month in cash as compensation due to him for his good services. He was a parliament member at the time and I cannot possibly understand why he agreed to this scheme.

I recently went to a museum and received a receipt lower than the sum I paid. I assume the cashier pocketed the money. I was too lazy to do anything about it. As a subsidized museum, I assume nobody cares anyhow.

Many years ago I had two cases in which workers swapped may credit card twice. I assume they somehow pocketed the money. Probably they were easily caught and this way of theft became unpopular.

JRo writes:

Surely an interesting facet of this problem can be found in the government sector where customer satisfaction and profit are less important. In the local commissary during a brief assignment at a southern Air Force base, I had a craving to nourish my cultural roots and asked an employee why there weren't any of the famous MoonPie confectionaries on the shelves. "The stock boys are always pilfering them, so we don't carry them anymore."

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