One of the greatest risks to owning a self-storage facility is employee theft. Not only can it result in loss of income, it can lead to an improper lien sale if the rent the customer paid is being pocketed instead of deposited into the business bank account.
To minimize this risk, self-storage owners must get comfortable with regularly auditing their properties or outsourcing the task to someone who’ll take responsibility for it. Audits aren’t only important to detect theft but to prevent it, and to close the gaps in staff training. You should also audit to confirm your policies and procedures are followed, generate more money, and ensure the business runs smoothly.
Factors to Theft
Although employee theft can occur anytime, there are three factors that make it more common. They are motivation, rationalization and opportunity.
Motivation occurs when financial pressure increases, causing a staff member to consider theft when he otherwise wouldn’t. When bills are piling up, a spouse or child is sick, or someone in the family loses a job, he may consider stealing to make ends meet. This isn’t to say that all employees will steal when these situations occur, but when motivation is present, the likelihood of theft increases.
Rationalization is when an employee makes the theft make sense for him. If he’s been employed by you for a long time and sees the amount of money deposited each month, he may feel entitled to his “fair share.” People who steal will rationalize that the money belongs to them because they’re working hard for it. They may also plan to pay it back or think you won’t notice it’s gone.
You don’t have much control over someone else’s motivation or rationalization, but you can control the opportunity! This type of theft happens when regular audits aren’t conducted. Even if your staff aren’t stealing, they may be giving away more in discounted rent and waived fees than you’d like. It’s much easier to have a customer stop yelling by waiving a $20 late fee than to explain why he has the fee and try to resolve the situation another way. If the policy on late fees isn’t clear, your staff may think it’s fine to waive it, but those fees add up.
Conducting regular audits, reviewing reports and giving feedback to staff on their performance will help avoid theft and ensure employees do a better job. Most managers genuinely want to do a good job; they just aren’t always trained in how.
How do you conduct an audit? I like to regularly check for “the big wins” and look at the smaller details in between. The biggest win in auditing a self-storage property is to compare the reality of the site with the information logged in your facility-management system.
Here are some simple steps you can follow: First, print a unit map and a secondary report, such as a walk-through or rent-roll report. Then walk through the property and confirm the status of each physical unit matches what’s on the report.
If the system shows the unit as rented, it should have a tenant lock on the door. If there isn’t a lock, you need to find out what happened. Did the tenant just move in or out? Did he forget the lock? Did he get robbed?
If the report shows a unit as vacant, the space should be empty. Open it and check. Some operators put a green lock or tag on vacant units. If the space isn’t empty, whose items are in there? How long have they been there? Who are they paying?
If the unit is noted as delinquent, it should have an overlock on the door next to the tenant lock. Locking the tenant out of the gate isn’t enough. If your manager isn’t overlocking the unit, it could be a sign that he’s pocketing the monthly rent and doesn’t want to alert the tenant.
If the unit is marked as being in auction status, again, it should have an overlock next to the tenant lock. If the tenant lock has already been cut, add a seal or wire tag to prove no one entered the unit after it was removed.
If the unit is marked as unrentable, there should be a plan to get it back in operation. I’ve seen managers make units unrentable only to rent them off the books and pocket the payment. Be especially careful with parking spots if your numbers aren’t clearly marked.
Marking the map as you examine each unit will also verify that all spaces are represented in the software system. Once all units are checked, review your reports to screen for any other possible issues.
There are several management reports you should use in your audit. The daily payment-summary report, for example, can be used to track money from the property to your bank account. If you start your accounting by entering bank deposits, you likely have sales tax mixed in with your income and are paying more in taxes than necessary. You must use the payment-summary report to enter your revenue into your accounting system, and then check to ensure the money was deposited each day. Having your manager make a separate deposit slip each day will make this job much easier.
Next, review the credits-issued report to see who’s receiving credits and from which staff member. Late fees seem to quickly get out of hand if your manager waives too many. My company has a policy that we waive one late fee per customer. If someone wants a second fee waived, he must sign up for autopay. Also, review the discounts report and check that each tenant with a student or military discount has a valid ID on file.
Watch for units that have been backdated out of the system. When staff works on Jan. 2 and you were closed on Jan. 1, they’ll need to backdate some tenants who moved out before the first. However, no one should be backdated in the middle of the month if your staff is doing regular walk-throughs.
The exceptions report is a gold mine of information when it comes to audits. I review each deleted charge and payment, unit change or edit, and anything else that catches my attention. It’s worth your time to learn how to read the exceptions report.
Finally, look at your price list and verify that all units of the same size and type are the same price. There shouldn’t be any reason that all 10-by-10s are $100 but one is $30. If the tenant is paying $30, let his rate reflect that variance. If your staff is editing unit rates to reflect tenant rates, your economic occupancy and gross potential numbers are incorrect. Plus, the rent roll won’t reflect the variance. It’s vital to have units properly priced.
Once you feel comfortable with the information in your reports, review other areas of the business, such as:
Payroll. Is your staff on site when they’re clocking in and out? This data can be verified with gate-code login and cameras. Also, looking at the log-on history in your software will show when employees are logging in and which computer they’re using.
Inventory. This area is at huge risk for theft. Counting inventory on a regular basis is crucial to controlling expenses and closing opportunity. Check to ensure your retail product inventory matches what’s in the management system.
Truck rentals. Most truck-rental companies have a close-day report that shows the amount of cash accepted by your staff. Your accountant should receive this report at the end of the month and reconcile the total to the books to ensure all the cash reported was deposited.
Prepaid cards. If you offer prepaid gas or gift cards in exchange for referrals, there should be controls in place. I did an audit for a company that offered prepaid gas cards. The cards’ serial numbers were logged into the system, but the staff worked around these controls by using only part of the card value. The cards were worth $50, and they used $30 for gas for their personal vehicles. The business didn’t find out until a customer called and complained.
Staff credit cards. Any staff member with a company credit card should submit the receipts to the accountant at the end of the month for reconciliation. Some businesses have the policy that any expense without a receipt comes out of the employee’s paycheck. Check your state laws to ensure you’re allowed to deduct this type of expense.
Auction deposits. Here’s another area ripe with opportunities for theft. If you’re holding live auctions, you need controls around the winning bid amount, the total the customer paid, and the amount that was deposited. Also, make sure no one entered the unit between the time the lock was cut and the auction was complete. Online auctions have helped eliminate to eliminate some of this risk. If you haven’t made the switch yet, you may want to consider it.
Whether you conduct your self-storage audits yourself or hire someone to do them for you, it’s critical that they be done regularly. In addition to uncovering possible employee theft, you might find other aspects of your business that require attention.
Magen Smith is a former self-storage manager turned certified public accountant (CPA). Her company, Magen Smith CPA LLC, helps storage operators understand the financial side of their business. Services include monthly financial management, bill-pay functions, revenue management and strategy. She also offers a curb-appeal checklist available for download and has created an online revenue-management course complete with checklists, cheat sheets and guides. For more information, e-mail [email protected]; visit www.selfstoragecpa.com.