When some people think about inventory theft, they imagine a shoplifter running out of a store with goods stuffed inside a jacket or bag. But that's not what the managers thought at the Famous Footwear store on Chicago's Madison Street. No, they suspected their own employees were the main cause of their unusually high shrinkage. One scam involved dishonest cashiers who would let their friends take a pair of Skechers without paying for them. To make it look like the shoes had been bought, cashiers would ring up a sale, but instead of charging $50 for shoes, they would charge only $2 for a bottle of shoe polish. That's when the company's managers decided to put its accounting system to work. In just two years, the company cut its Madison Street inventory losses in half. Here's how a newspaper described the store's improvements:
Retailers Crack Down on Employee Theft
SouthCoast Today, September 10, 2000, Chicago
By Calmetta Coleman, Wall Street Journal Staff Writer
. . . Famous Footwear installed a chainwide register-monitoring system to sniff out suspicious transactions, such as unusually large numbers of refunds or voids, or repeated sales of cheap goods.
. . . [B]efore an employee can issue a cash refund, a second worker must be present to see the customer and inspect the merchandise.
. . . [T]he chain has set up a toll-free hotline for employees to use to report suspicions about co-workers.
These improvements in inventory control came as welcome news for investors and creditors
of Brown Shoe Company, the company that owns Famous Footwear. Despite these improvements at the Chicago store, Brown Shoe has been forced to shut down operations in other cities.
Required:
1. Explain how the register-monitoring system would allow Famous Footwear to cut down on employee theft.
2. What is the name of the control principle that is addressed by Famous Footwear's new cash refund procedure?
3. If Famous Footwear used a periodic inventory system, rather than a perpetual inventory system, how would the company detect shrinkage?
4. Think of and describe at least four different parties that are harmed by the type of inventory theft described in this case.