Understanding and Avoiding Retail Fraud

Theft is a perennial risk for nearly all retailers. Depending upon the strength of their internal controls, retailers can be particularly vulnerable to internal losses at the point of sale. Most retailers do a good job controlling their inventories and handling their bulk cash. However, it is the small transactions at the counter where the biggest losses can occur. With numerous ways for an employee to commit a theft at the point of sale, many of these thefts will go undetected without the proper audit procedures in place. Below are nine of the most common examples of retail fraud:

1. Under-ringing and upcharging. This is when the cashier does not ring up the entire sale or charges the customer more than the actual cost of the item. This is the simplest way for employees to steal, and is hard for managers to detect. A cashier’s digital display, showing the customer what the cost of the transaction should be, is the best deterrent to this kind of theft.


2. Cash drawer interlock. The cashier’s drawer should not be able to open unless a sale is rung up. Otherwise, transactions can be made and the sales not recorded. If this feature is not available on a register system, the cashier can simply make change for the transaction from the open drawer and the money from the sale is theirs. High inventory costs and lower transactions counts could indicate unrecorded sales.


3. Sales cancellations. Most register systems are equipped with a feature to allow a part of a sales transaction to be removed from the system prior to the sales amount being recorded. This feature allows the customer to change or to cancel part of their purchase without voiding other items already entered into the system. This feature can also be used to steal. A cashier can reduce a sale on the register system and still satisfy the customer by providing the correct change and the items purchased. The problem is the cashier can retain the amount reduced for his or her own profit. A large number of sales cancellations and a low number of average-sales-per cashier may be indications of theft of sales.


4. Refunds. Cash theft can be covered up by fictitious refund slips. All cash refunds should be supported by the managers and cashiers signatures and refund activity should be monitored closely.


5. Coupon reductions/discounts. Many point-of-sale systems have a discount key for coupon redemptions, special sales and promotions. This can be a license to steal if not monitored properly. A high amount of unsupported discount activity coupled with lower average sales could indicate a misuse of this function.


6. Tax readings. A manager with programming capabilities can adjust the tax readings on the register system a fraction of a percent. In a high-volume setting, customers may be overcharged hundreds of dollars a day.


7. Price adjustments. The listed price of an item does not have to be the same price programmed into the register system. A manager with programming capabilities can adjust the price of items in most systems. An adjustment of a few cents per item in a large volume-environment could mean the theft of thousands of dollars a month.


8. Training mode. Many register systems offer a training feature, which allows managers to train cashiers on a register without the activity being recorded as actual sales. A register with this feature allows the manager the opportunity to put a register in training mode while being used for actual sales transactions. The misuse of this feature for theft could be financially devastating to a company as hundreds of transactions could occur daily and not be recorded into the system.


9. Register removals. Many register systems can be moved offline and continue to operate. This allows managers to ring up sales that are not recorded as part of storewide sales. Register removals and sales readings should be monitored very closely

Theft tracks

The following situations may be indicators of fraudulent activity in the retail environment. Any one of these indicators should initiate further investigation by management.

• Decreasing sales with increasing inventory costs


• Lower average sale per cashier


• Lower transaction counts per cashier


• Rising cost of operations without an increase in sales volume


• Decreasing sales while payroll is increasing


• Lack of proper signature authorization on refunds and returned goods

How to prevent retail fraud

Obviously, there are several ways to steal money at the point of sale. The major concern is that many of these methods of theft are not detectable by normal audit procedures. Employers in the retail business must be sure that the register activity at their retail locations is audited on a regular basis. More importantly, the auditors must be trained to look for the theft tracks that could indicate fraudulent activity.

Many retailers have started utilizing exception audit techniques, where excepted ranges of activity on the register system are preprogrammed and a report is generated that will red flag any activity that exceeds the predetermined ranges (i.e., excessive promotions, sales cancellations, refunds, etc.)

It is equally important that retailers establish register and cash handling procedures for all of their cashiers. This includes ensuring all cashier and managers are properly trained and understand the retailer’s policies and procedures.