CASE STUDY: DEMOTION SETS FRAUD IN MOTION states. Following a demotion and consequent pay cut, Bob Walker the asset protection (security) department at headquarters to silently vowed to even the score with his employer. In six investigate what he termed strange entries. months Walker racked up $10,000 in ill-gotten cash from Thrifty PayLess pays serious attention to such phone calls, his employer, who was caught completely off-guard, before according to its director of asset protection, James Hansen, someone blew the whistle. who celebrated his thirteenth anniversary with the retailer that The whistleblower was Emily Schlitz, who worked week- year. In 57 percent of the fraud cases for that year, Hansen ends as a backup bookkeeper at a unit of Thrifty PayLess, reported, investigators received their first alert directly from a chain of 1,000 discount drugstores crossing ten Western store managers, as in this case. The strange entries that Schlitz found called for immedi- One October, while reviewing her store's refund log, ate action. Hansen dispatched a field investigator, Raymond Schlitz noticed an unusually large number of protocol breaches Willis, to review the findings and conduct a brief background by the head cashier-one Bob Walkerwho naturally han- dled most refunds. In issuing cash refunds for big-ticket items, check of Walkera thirty-two-year-old single male who had for instance, Walker frequently failed to record the customer's been employed by Thrifty PayLess for five years. Willis soon learned that six months earlier the store man- phone number. Often, he neglected to attach sales receipts to the refund log, noting that the customers wanted to keep ager, citing poor performance, had demoted Walker from a their receipts. Schlitz questioned the high proportion of these management position to head cashier, which also brought a irregularities and notified the store manager, who in turn called $300 a month pay cut for Walker. To Willis, that informa- tion alone raised some red flags that signal potential fraud by employees: personal or financial problems, lifestyle changes 1 Several names and details have been changed to preserve anonymity. or pressures, and low morale or feelings of resentment. Further inquiry revealed Walker blamed management for absence of a sales receipt, Walker deliberately thumbed his the demotion. nose at those rules and others. No one ever questioned the But those red flags paled next to the wealth of evidence signature authority of this recently defrocked member of the Willis uncovered during his investigation. He began by call management team. ing customers listed in the refund log to politely inquire about To further justify his actions, Walker detailed his previous the service they received at the drugstore, discreetly looking financial problems, which he said were exacerbated by the for verification or vilification. Next, he compared the num- $300 monthly pay cut. ber of refunds for food processorsby far the most popular Proceeds from the fraud initially went toward his two merchandise itcm Walker accepted for retumto the number mortgage payments, which cqualcd $800 a month. His ongo- originally received in shipment minus those sold. These num- ing booty subsequently financed his insurance premiums and bers were in turn compared to the food processors actually in living expenses, which were now mounting. He easily paid off stock. The investigator discovered major discrepancies. his credit cards. The single man also used the cash for fancy Willis brought the case to a conclusion in just three days. dinners out on the town. "He stayed awake nights working on this one because he During the two-hour-long confrontation, Walker claimed quickly saw the enommity of the take," recalled boss Hansen. ignorance about the exact amount he'd filched, saying he had "It just fueled his fire." never tallied the score. He did admit, however, that he played "The perpetrator had really gotten carried away with his this lucrative game with a growing ardor and intensity. activity. As will often happen, over time he got greedy. As it turned out, all three refunds Walker had issued the And once Walker got greedy, he got careless and sloppy," day of the interview proved fraudulent. Yet he still seemed said Hansen. shocked that his fraud totaled upwards of $10,000more than Although aggressive in his investigation, Willis kept it five-and-a-half times the total pay cut he had endured over the quiet. He limited his interviews to just two or three of past six months. Walker's fellow employees. "Several coworkers had previ- In a store that generates $4 million in annual sales, $10,000 ously told managers that Walker seemed disgruntled and over six months represents a small percentage of loss. In somewhat upset. But outwardly, his frustration never peaked the retailing industry, such shrinkage may be explained away enough to warrant the need for management to keep an eye on by shoplifting, bad checks, accounting or paperwork errors, this guy," explained Hansen. breakage or spoilage, shipping shortages, or numerous other At the end of Willis's third day in the field, it was time reasons. Employee theft, of course, is also a significant factor to interview Walker. Initially, Willis asked general questions in shrinkage, said Hansen, who began his career as a store about store policies and procedures. He went on to focus more detective on cashiering methods. Walker seemed at ease in the beginning, "In my mind, a comprehensive loss prevention program is helpful and responsive. At one point, Walker even offered the well balanced between preventive and investigative efforts." suggestion that "more controls should be placed on refunds." He said Thrifty PayLess maintains an outstanding educational As the interview progressed, however, Walker got more program for all employees. They attend mandated training and more nervous. The smooth talker began to stutter and classes in both the prevention and detection of fraud. Cru- stammer. Willis asked Walker if he knew the definition of cial to the success of the antifraud program, employees are shrinkage. He haltingly replied, "for one, loss of cash or always made to feel like an integral part of Thrifty PayLess's inventory due to customer or employee theft." whole loss prevention effort. Hansen and his asset protection Willis then asked, "What have you personally done to staff regularly visit the stores to introduce themselves, become cause shrinkage?" Walker became very quiet. After a long familiar to employees, form and maintain rapport, and build a pause, he asked in a hushed tone, "Well, what if I did do it?" level of trust in confidentiality. To further encourage commu- Willis laid out the consequences and continued to query the nication, the retailer established a hotline that employees can formerly trusted employee. call with anonymous tips about suspected fraud or abuse. Walker vented his anger toward the managers who had As evidenced by the part-time bookkeeper's suspicions "unjustly" demoted him. He confessed to writing fake cash and subsequent actions in this case, Thrifty PayLess's efforts refunds in retaliation. While the fraud began in May as an obviously work, said the head of security. It's not that our occasional act, it soon increased in frequency and flagrancy. controls were in any way inadequate; it's that a local manager At first, to fulfill the blanks on the customer information part was not properly enforcing those controls. Generally, he got of the refund log, he pulled names at random from the phone lax with a 'trusted' employee." (Needless to say, the store book. Later he simply made up names and phone numbers, he manager suffered some repercussions as a result of this case.) said. As his greed escalated, he altered legitimate refunds that As a result of the Walker experience, manager approval he had issued earlier in the day, adding merchandise to inflate is now required for all refunds over $5. A sales receipt must their monetary value and pocketing the difference. also accompany all refunds, said Hansen. Thrifty PayLess's Although store policy dictated that management approval internal audit and asset protection departments perform audits was required for refunds totaling more than $25 or in the regularly. checking for compliance. Proper implementation is the key. Hansen continued, Owing to the grand scale of theft in this case, Walker was "You cannot prevent fraud 100 percent. The best you can do is arrested immediately after his interview, booked on felony to limit it through your proactive educational, awareness, and charges of embezzlement, and held pending bail. He faced audit programs. Of course, aggressively investigating all red criminal and civil prosecution. Walker made bail within hours, flags or tips as well. Hansen's asset protection department then disappeared without a trace. All investigative efforts to concludes over 1,400 employee theft and fraud cases and locate him thus far have failed. 30,000 customer shoplifting cases annually. To this day Bob Walker remains a fugitive of justice. 8-1 (Learning objective 8-4) In the case study involving Bob Walker at the beginning of this chapter, what type of register disbursement schemes did he commit? Discuss the role his recent demotion played in the scheme