Every day, retailers across the country issue refunds to customers for reasons that range from a bad fit to the wrong colour to a question of taste.

Despite the nuisance of taking the items back, a refund situation can turn into a sales opportunity when well-trained employees convince people making returns to buy additional merchandise. But too often, the transaction turns out to be refund fraud, a crime that, according to experts, cost retailers billions of dollars a year.

Retail refund fraud comes in many shapes: In some cases, scammers return merchandise they never bought from your store, while in other cases they return items an employee stole, splitting the refund.

The trick for you and your employees is to prevent or reduce instances of this type of fraud while maintaining superior customer service. Here are some tips that can help you battle this crime:

  • Require receipts: This won't eradicate refund fraud, but it is a powerful deterrent. As an alternative, get the name, address, and phone number of the person returning the merchandise and ask for a reason. For added security, require a picture ID, preferably showing the person's address. Make follow-up phone calls to verify that the customer whose name is on the refund slip is the same person who made the purchase and the return.
  • Set cash limits: When the price of the merchandise exceeds a set amount, send the refund by mail. However, be sure not to publicize the dollar limit as thieves will simply grab merchandise that falls just under the limit.
  • Use credit vouchers: This eliminates the need to hand out cash. Thieves generally don't want to fill out forms or show ID, so requiring basic information for credit vouchers helps deter fraud. Number the vouchers sequentially and require managers or supervisors to authorize the return with their signatures. Add to the deterrent factor by requiring two approval signatures for all refunds, cash or otherwise.
  • Mine data: The information you gather during the returns process contains a wealth of fraud-fighting information. Look for clues to fraud such as the same phone number on file for multiple refunds by different customers, disconnected phone numbers, and addresses that are close to where an employee lives.
  • Confirm payment: Before initiating the refund, make sure your business received the initial payment. Some fraudsters purchase merchandise with credit cards that have been reported lost or stolen. Confirm the payment even if it's not possible at the time of the refund. You may still uncover employee or customer fraud.
  • Centralize refunds: Limit the number of employees who can issue refunds to ensure that your company's refund policy is being followed and to deter employee fraud.
  • Monitor refunds: Keep an eye on average return amounts, the employees performing the refunds, the frequency of refunds by sales location, and the types of merchandise returned. Watch for a higher frequency of returns when particular employees are on duty.

Talk to your accountant about developing a fraud deterrent plan and about analyzing refund activity to keep your bottom line healthier.

For more information:

Panagiotis (Peter) Linardakis, CPA, CA,
Tel: 514-842-3911 ext 239