Internal Controls in a Retail Store

Originally Posted on May 28, 2014

Strong internal controls are an important component in helping Retail Store Businesses reduce possible fraud usually caused by employee theft and customer shoplifting. Smaller businesses are especially susceptible to have higher shrinkage than larger companies.
Shrinkage cannot be totally eliminated, but can be substantially reduced by implementing the following:

Store Design and Security

• Design the Store layout so that customers must pass the register area to exit the store
• Ensure adequate lighting in all areas of the store
• Eliminate blind spots in corners by putting in mirrors or cameras
• Limit the number of items each customer can take to the Dressing Room
• Put alarms in back door/ unused exits, which go off if the exit door is opened
• Close or block off unused checkout aisles
• Install security equipment such as CCTV cameras. If it is a big store then, covering the entire space with cameras may not be feasible. Install dummy cameras to act as deterrence.
• Put Anti-theft tags on small, expensive items or keep them in locked cabinets
• Keep store areas neat and clean so that it’s easier to observe customers and manage security
• Place signs in store which state that shoplifters will be prosecuted to the full extent of the law
• Greet every customer that comes into the store. This serves a dual purpose: First it helps in customer service and second deters shoplifters as they do not want to be noticed.
• Provide personal customer service to as many customers as possible
• Have a Shoplifting Policy and Procedures in place to provide guidance to employees on the following:
  • How to identify suspicious customers or shoplifters?
  • What procedure to follow if a shoplifting event occurs?
• Train new hires on all policies and provide annual training to existing employees
• Have a tips hot line for employees to report potential shrinkage

Sale Terminals

• Sales terminals should show the customer, each item’s cost during the ringing process to prevent incorrect charges
• Require an authorization by a second person before a sale can be voided by the cashier
• Ensure blind counting by someone other than the cashier on a periodic basis
• Provide each customer a receipt for every purchase. Have a policy which states that a customer will receive say $5 if the cashier fails to provide the receipt. Put visible signs at the sale terminals so that the customers are informed of this policy.
• Require receipts for refunds for cash

Owner/Store Manager

• Visit the retail store(s) unannounced.
• Have the store mystery shopped. The mystery shopper can provide feedback on customer service as well as compliance with policies and procedures by employees
• Perform periodic self-assessment audits
• Monitor the cash receipts, sales, customer returns, and promotional reductions on a daily basis. Any unusual variances should be investigated and explained.
• Perform regular inventories of high theft items.
• Perform surprise cash counts.
• Track employee purchases for any unusual activity.

Cash Deposits

• Maintain adequate segregation of duties in the cash deposit process. Different employees should perform the following;
  • Receive, count and deposit cash in Bank
  • Reconcile sales receipts and bank statement
  • Record payments in the General Ledger
• Deposit cash from cash sales daily in bank
• Perform pre-employment background checks on all employees who handle cash

In the retail industry many stores have large staffs, allowing multiple people access to registers and inventory. Creating a systemic set of controls and procedures is crucial to limit fraud and business loss. Owners should implement additional controls to cover other areas of the business such as payroll, accounts payable, accounts receivable and financial reporting. An established set of procedures and internal controls includes separation of duties, identified areas of authorization, responsibility and accountability.