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When theft is an inside job.


IN THE MEDICAL PROFESSION ONE OF THE biggest dangers to a patient's health is internal bleeding. Undetected, it weakens the patient and can lead to death. In industry, the same case can be made for the problem of internal theft. Many seemingly healthy companies have been destroyed from within by the often undetected actions of their own employees. Many more survive but fail to yield the proper return on their efforts because of the losses caused by employee dishonesty.

How much is lost? The Department of Commerce reports American businesses suffer $40 billion annually in direct losses as a result of employee theft. Robert Half and Associates, a New York-based consulting and research firm, estimates that $100 billion is lost yearly in time theft, including such employee conduct as personal calls, long lunches, late arrivals, early departures, faked sick days, extended breaks, and tending to personal business on company time. The Drug Enforcement Administration states that $60 billion is being lost annually through expenses related to the presence of substance abusers on the payroll. These expenses include losses due to employee absence and direct costs from employee assistance program expenditures for medical care and rehabilitation efforts.

Specific incidences of employee theft are often brushed aside without considering their cumulative effect. Who wants to tell a secretary that her calls to check on her children's after-school plans represent unacceptable behavior? Who studies expense account reports with an eye for false claims? Who wants to tell a vice president that his use of the copy machine to run off his neighborhood association's newsletter sets a bad example and falls in the same realm as stealing products from the warehouse?

There really is no category of harmless theft. A company that does not stand firm on all issues of theft will find the rules bent and broken in every way. The result is lost profit and a spiral of growing losses as the company becomes more open to abuse. HOW CAN MANAGEMENT CREATE A CLIMATE in which honesty is the only policy? It can establish a plan that deals with the problem at three levels: hire only those employees who have demonstrated they pose a low risk for dishonest behavior, develop and maintain procedures that minimize the possibility of dishonest behavior, and act decisively when dishonesty is discovered.

The foundation for success lies in the hiring process. The investment in careful employee selection yields specific gains in lower turnover, reduced shrinkage, and better performance. Even the best recruiter or most careful reference check may fail to uncover attitudes and behavior patterns that may lead to dishonest behavior on the job. Therefore, concerned employers routinely use paper-and-pencil assessment tests as part of their preemployment process.

These tests, developed by experts and verified through careful review, have a proven record of effectiveness. They reveal past behavior and present attitudes toward issues such as drug usage, giving purchase discounts to friends, relationships with supervisors, and loyalty to employers. Responses are evaluated and scored to indicate whether a candidate should be considered as a low-risk, moderate-risk, or high-risk selection. With this guidance a company has important information on an individual's potential success as an employee. The hiring decision is then left to the company.

Companies without testing programs may resist the idea at first. Those that have not seen the results of case studies may be shocked to discover how much money a company saves through this practice. The documented figures seem too good to be true. Managers who pride themselves on their ability to size people up may be insulted by the idea of using a testing procedure to aid in the decision-making process. Those who labor in tight employment areas may feel the use of tests will reduce their potential labor pool even further. Others may see a testing program as more red tape.

By carefully addressing each concern, a company can successfully implement a testing program that brings good results. The profit potential from the investment in tests is obvious. Interviewers who understand that the test is a tool, a way to make their jobs easier, quickly come to appreciate testing as a way to improve their hiring success. Those faced with a difficult hiring challenge respond positively to the prospect of reduced turnover and being able to identify the best people for each opening.

The red tape argument is settled when staff members see how quickly tests can be administered and scored. Leading test suppliers offer many test and scoring options including computerized programs, instant telephone results, and on-site processing. Every company can have a customized program to suit its needs.

THREE CASE STUDIES FROM COMpanies that tested testing before recommending storewide implementation indicate the effectiveness of such programs. Their results have been duplicated and verified by many others.

A major national automotive supplier established a 12-store pilot program that lasted for one year. In that year, those stores showed a shrinkage decrease in excess of $27,000 and a 12 percent decrease in employee turnover. The chain is now in its first full year of company-wide test use and is already experiencing comparable results in reduced loss from shrinkage and increased gains in developing a more stable work force.

In a study conducted by a Michigan retailer, three identical stores were compared during a one-year period. The stores were within a 40-mile radius of one another, had similar layouts, and held their grand openings during the first month of the study. The purpose of the study was to determine if test usage related to inventory shortages, quality of new hires, and the rate of turnover.

One store gave the test and made hiring decisions guided by test results. A second store gave the test but did not use the results as a part of the hiring decision. The third store acted as a control and did not give tests except for employees being considered in sensitive categories such as cash office, shipping and receiving, fine jewelry, and loss prevention. This type of sensitive-employee testing was already routine and was being applied to about one third of the unit's employee total.

The differences in performance in several areas are significant. Under reasons for termination, the store relying on testing dismissed only one employee for theft. The control store dismissed nine. Only four employees abandoned their jobs in the store that used testing. Thirty-nine walked off from the store that did not consider tests and 28 left the control store. Seasonal layoffs affected 53 in the control store, 37 in the store that did not consider test scores, and just 17 in the store that used testing.

The overall rate of turnover was 6.50 percent for the control store, 6.14 percent for the store that tested but hired without reference to scores, and 4.80 percent in the store that used testing. Significantly, many of those who left this store did so to take advantage of better job opportunities or to continue their education.

In terms of job tenure among those who left, only 73 percent failed to complete six months on the job. This compares favorably to the control store, which lost 86.5 percent of its terminated employees before that time, and the store that tested but did not use the results, which lost 83.3 percent of its terminated employees before they had completed six months with the company. This improvement in retention has a direct impact on hiring and training costs.

Another significant retention figure shows up when risk categories are compared. In both stores that gave tests, the figures show that among those employees who remained on the job six months or longer, more than 70 percent were in the low-risk range. Even among those who left their jobs, the figures indicate that the low-risk individuals remained longer.

Inventory shortage figures for each store were particularly revealing. The chain-wide average for loss is 1.80 percent. The control store posted a 1.50 percent shortage. The store that only administered the test showed a 2.40 percent shortage. The store that used the test in hiring decisions actually posted a 0.02 average and turned in a decidedly more profitable performance.

In its summary of test results, the company recommended chainwide use of testing to identify more responsible employees, reduce turnover, and protect against dollar losses caused by inventory shortages. The investment in testing was determined to be a wise decision for better business results.

In a third study, a West Coast-based department store chain conducted a seven-month study using stores that reported the highest frequency of dishonest-employee terminations during the previous year. Five stores implemented testing, and five stores were used as controls, not administering tests.

All candidates were given a preemployment interview. Tests were given only to those persons who would normally have been considered for hiring. Stores using the test hired only those whose test scores fell within the range deemed suitable by management. Among those taking the test, 18.3 percent failed to meet that test score criterion. Of those, 30.3 percent indicated involvement in criminal activity of some nature. Only 0.2 percent of those who were recommended had any such admissions. In the stores using the test, turnover rates decreased by 48.1 percent, dishonest-employee terminations dropped 42.2 percent, and shortages were reduced by 33.3 percent. Based on these results, this chain, too, went to full use of preemployment testing.

ONCE HONEST EMPLOYEES HAVE been identified and hired, companies have a responsibility to maintain practices that minimize the potential for dishonest incidents. Clearly, these practices must have support and comparable standards at every management level. It is counterproductive to tell hourly employees that certain procedures are expected when they see the poor example of supervisory personnel who operate under less stringent guidelines. The dollars lost to a company through any pattern of employee misappropriation of time, services, or materials are equally important.

Managers should implement the following suggestions: * Stress the importance of employee honesty through open channels of communication. * Establish firm guidelines that every employee recognizes as inviolable concerning the handling of materials, money, and tools; the use of supplies and equipment; and attendance. * Follow through on policies that outline disciplinary actions when such guidelines are violated. * See that damaged goods are disposed of through a controlled system so there is little temptation to take such materials for personal use or to damage items for personal gain. Likewise, where applicable, control markdown processes and food disposal so employees cannot abuse their access to inventory. * Reward employee vigilance when appropriate. Honest employees do not want to see their jobs jeopardized by the actions of the dishonest. * Make it easy for employees to provide information without personal risk and to make positive suggestions about improvements in operations or controls.

Just as those who are making a contribution need the morale boost of positive recognition, those who are causing a problem through overt acts of dishonesty or routine disregard for the rules need to be dismissed. Decisive action, including an appropriate ladder of disciplinary action, signals to all employees that the company commitment to honesty is genuine. Taking a tough position serves as a warning to those who may be tempted and as a comfort to those who are offended by the actions of the dishonest.

Loyal employees want the best for their company. They understand that dishonesty undermines job security because it puts the well-being of the company at risk. Further, they resent the fact that their personal efforts, including maintaining high standards of integrity, are minimized by those who show no concern for the rules. A firm policy against dishonesty is welcomed by the employees who do the most for the company, and it quickly weeds out those who mean to cause the company harm.

By confronting the problem of internal theft and dealing with it in the hiring process, in policy making, and in consistent enforcement of standards, companies can turn the figures around. As the case studies show, there can be a reduction in the massive dollar losses that companies now experience. Those dollars can be moved to the profit side, where they can stimulate growth and provide better opportunities for everyone. All it takes is a willingness to act, to make this message simple and plain: Honesty is not an option; theft will not be tolerated.

James D. Walls is executive vice president of Stanton Corporation, a maker of paper-and-pencil assessment tests in Charlotte, NC.
COPYRIGHT 1989 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Walls, James D.
Publication:Security Management
Date:Apr 1, 1989
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