Get to know Fraud in Retail

Fraud in Retail

What is Shrink

Shrink, or Inventory Shrinkage is an accounting general term that occurs when there is a difference between recorded inventory on a company’s balance sheet and its recorded inventory. This concept is a key problem for retailers, as it results in the loss of inventory, which ultimately means loss of profits.

Regardless of how Shrink occurs either by accident or deliberate, it negatively impacts everyone; including customers. When profit margins decrease, the cost of goods increase.

Some shrink can be attributed to administrative errors, paperwork errors, vendor compliance and damages that goods suffer in the normal run of the supply chain process; However, the other causes are generally employees, customers, and gaps in procedures or training.

Companies with a high shrink will suffer from an associated loss of revenue, and a proportionally higher cost of sales than their competitors making it extremely difficult to compete within their respective market place.

How bad is the problem?

The 2020 National Retail Security Survey finds shrink at an all-time high, accounting for 1.62% of a retailer’s bottom line — costing the industry $61.7 billion. It cuts deeply across the industry too, with seven in 10 reporting a shrink rate that exceeds 1%.

IntelliQ’s research indicates that on average, as much as 9% of total sales of a company can be exposed to the risk of fraud. This includes transactions where there are potentially risky business practices in place, incorrect operator training as well as outright fraud.

What drives fraud in a retail environment?

The three elements of fraud are opportunity, rationalisation, and motivation or pressure. For fraud to occur, all three elements must be present. The atmosphere, and environment are as important as the people when looking to deter fraud. By removing any one element, you eliminate the opportunity for fraud. For 80% of the population, how someone feels about a company, their personal circumstances, and what controls may or may not be in place, all play a role into someone decision making, regardless of whether it is a good decision or bad decision.

How does internal fraud take place?

Employees in companies have multiple methods of manipulating sales and inventory, but the primary causes are always similar:

Too much trust placed into employees’ hands
Weak internal controls that can be bypassed
Lack of segregation of duties, allowing data to be misreported
Lack of a comprehensive checking mechanism that would instil the fear of being caught for the fraudster

How do I fight fraud?

Overwhelmingly, companies are turning to analytic solutions in order to identify the gaps in their systems and processes. These systems help improve visibility to operational controls and procedural gaps that exist so companies can strategically invest their limited resources in the areas that will have the greatest return.

Using Forensic Analytics, Loss Prevention can effectively do more with less resources. They can quickly identify exceptions and uncover hidden behaviour that suggests fraud is being committed.