Do Internal Management Controls Mitigate Employee Theft in Chain Organizations?

Abstract

Employee theft is a major problem affecting most U.S. businesses every year. This problem is particularly severe for the retail industry, as it results in $26 billion in losses every year. In this study, we examine the extent to which internal management controls mitigate employee theft. Specifically, we investigate the effectiveness of two types of internal control systems: technology-based monitoring and mutual (peer) monitoring. We analyze store-level and chain-level data from the convenience store industry and find that: 1) Employee turnover is positively associated with employee theft; 2) Mutual monitoring alleviates employee theft directly; and 3) Both internal control systems, technology-based and mutual monitoring, mitigate employee theft indirectly by reducing the strength of the relationship between employee turnover and employee theft. The results suggest that internal management controls alleviate the agency problem of theft in chain organizations. Our study adds to a stream of empirical studies that examines the effects of different control mechanisms in alleviating agency problems. Our study also contributes to this stream of literature by documenting the role of mutual monitoring in reducing employee theft.