Red Flags for Fraud in Retail

Retail managers are prepared for the shoplifter who drops a jar of caviar in his coat pocket.  They know about the return artist who buys a dress on Friday and decides to return it on Sunday after her Saturday night date. They’re watching for cashiers who consistently don’t balance and for unusual inventory shrinkage.

In fact according to the preliminary results of the 2007 National Retail Security Survey released in June “dollar losses from theft and fraud have reached an all-time high…Total retail losses increased last year to $41.6 billion.”* Retailers are investing in alarms closed circuit television digital video check screening and point of sale software to try to curtail criminal activity.

But some of the most potentially costly fraud schemes operating in the retail industry happen far from the selling floor the security cameras and the cash register. They happen when employees behind the scenes circumvent processes and take advantage of insufficient oversight. Retailers face some unique risks that can have a potentially devastating impact on the company’s bottom line and reputation. Retail companies should be proactive in identifying fraud risks and implementing anti-fraud programs and controls to minimize the risk of fraud.

Three common categories of fraud that affect the retail industry are financial reporting fraud misappropriation of assets and unauthorized receipts and expenditures.   Below we explain some of the varieties each identify some of the risk factors which could cause a business to be victimized and outline red flags to watch for.

Financial reporting fraud can come in many forms and is generally committed to make an entity or a subsidiary branch or operating center of an entity appear to have performed better than it actually has.   One of the most common issues relates to revenue recognition schemes wherein sales are boosted to mislead management shareholders or lenders regarding the performance of a particular entity location product line or sales team. While the perpetrator might not realize an immediate benefit from the scheme such individuals might benefit indirectly by improperly receiving commissions or other incentives such as stock awards based on fraudulent information. Perpetrators of these schemes can be anyone who has an incentive or perhaps is under significant amount of pressure to show positive results and has the opportunity to commit fraud.

There are many types of revenue recognition schemes. Some of the more common issues follow. 

”