EDITORS NOTE: Sandy Katz is vice president of audit and control for Talbots, the specialty retailer focusing on misses, petites, and women’s fashions, as well as children’s, accessories and shoes, and, most recently, men’s apparel. For the past fifteen years he has been responsible for the establishment and maintenance of the appropriate control environment through out the company, including loss prevention, internal audit, inventory control, sales audit, and policies and procedures.
EDITOR: You have the relatively unusual situation of responsibility for both loss prevention and internal audit. Talk a little about how those responsibilities fit together.
KATZ: There is a natural synergy between the two functions in that both are focused on ensuring the most profitable and properly controlled operation possible within the constraints and operating style of the company. While they accomplish their responsibilities some what differently, there is an opportunity for them to work together more effectively than they might be otherwise. For example, there are many aspects of corporate internal audit from an operational perspective that can utilize the expertise and knowledge of the loss prevention function to facilitate their responsibilities. And, on the other hand, we’ve had many times when loss prevention has utilized the expertise of the corporate internal audit department to facilitate what they’re doing as well.
EDITOR: Do you also serve on the corporate audit committee?
KATZ: Technically, the audit committee is made up of independent directors of the company. But as the head of the audit function within Talbots, I have a dotted line to them with the ability to speak to them as needed.
EDITOR: Many people regard the internal audit function as a very objective discipline in the company, while loss prevention, based upon where they’re reporting, not always having the same objectivity. Do you find balancing the two disciplines a challenge?
KATZ: There are different weights that play on the two different functions. One of loss preventions primary focuses is with the stores organization. When you have people that spend the predominance of their time in the field working with store associates, you want them to develop a working relationship with them so that were sending one message. That lends itself to a slightly different focus than an internal audit function that is generally head quartered in corporate headquarters and auditing centralized functions for the most part.
EDITOR: How did you come to take over responsibility for these two areas?
KATZ: I started out in the financial audit area. My under graduate degree is in accounting, and I worked in public accounting for five years before I left to go to internal audit with in private industry. It was about ten years later before I entered the area of loss prevention The company I was working at then was having major shortage problems. The CEO had been trying to lead the effort himself, but came to realize that he needed someone else to handle the function, so he asked me to take it over. That was 1979, and I’ve been involved in both loss prevention as well as the financial area since.
EDITOR: Most people know Talbots as women’s fashions, but that’s been changing in recent years. Tell us a little bit about the company.
KATZ: Talbots is an international, publicly-owned specialty retailer. We were founded in 1947 as a misses specialty store. The following year we introduced the first catalog in the company’s history. Since then, we’ve experienced continuous growth, particularly after the Japanese retailer JUSCO, which is now known as AEON, purchased Talbots from General Mills in 1988. In 1993 we went public on the New York Stock Exchange.
Over the years we’ve expanded beyond misses, which is our core business, into several compatible, yet different, vehicles, including petites, women’s, accessories and shoes, kids, and our latest venture, Talbots men’s, which we started offering via catalog two years ago and opened our first store about a year and a half ago. While we have different vehicles, we are consistent to who our customer is.
We currently have approximately 11,000 associates and over 1,050 stores in the U.S., Canada, and the United Kingdom. We have a variety of locations with a majority of our stores in non-mall locations. Lifestyle centers are becoming increasingly important to us. We also have a lot of downtown stores. Sometimes our different concepts are located next to each other and connected, and other times they are completely separate. Were not locked into one format.
EDITOR: While you have multiple brands, you manage the LP and audit functions with a single field organization, isn’t that right?
KATZ: Absolutely. We do not have separate organizations within each brand. Its one for the total company, which is most efficient. If you are visiting a location, you can work with one store or the five stores next to each other with much the same amount of effort.
EDITOR: In this day and age when every five years half of the senior LP executives in the industry turn over, you’re an exception. You’ve been at Talbots for fifteen years. Why is that?
KATZ: There is a combination of factors. One, its a terrific company to work for and extremely successful. Number two, we’re an exception in retail because we’ve had a very consistent executive group. Typically retail companies turn over most of their executive management, and not just loss prevention management, every three to five years. Our chairman, president, and CEO has been at Talbots over fifteen years. In addition, I’ve worked with the CFO both here and previously at General Mills. So, there’s a lot of continuity. The other factor is that I have some terrific people working for me, and we’ve been able to maintain longevity there, too. Our directors of LP and internal audit have been with the company eighteen years and ten years respectively. Of the LP regionals in the field, the shortest tenure is over five years.
EDITOR: Those are exceptional factors.
KATZ: They are and we pride ourselves on that. We believe this longevity is important for the continuity of our programs with the stores organization. For example, I’ve known the executive vice president in charge of stores since I joined General Mills in 1984 when she was a district manager. So, all this continuity makes it a little more effective to get things done.
EDITOR: Speaking of getting things done, lets turn our attention to some of the nuts and bolts of your programs. What do you see are the key factors in fighting shrinkage in a retail company?
KATZ: I have to say, number one is knowledge and education. We are a company that focuses on our associates as our number one asset in both sales and loss prevention. We have found that the more you work with the associates, ensuring that they have the knowledge base that they need to do their job as well as the support, you can have great results.
One of the aspects that we’ve realized over time is that you have to keep going back to basics because of the turn over that’s natural in the retail environment. If you keep developing more progressive awareness and education programs, you’re going to lose the new hires. So, its become a split function. You have to ensure you bring the new hires up to speed as quickly as possible, but not lose the interest of associates who’ve been here ten or twenty years.
EDITOR: Are there new systems that have been implemented in your company that have been instrumental in achieving success for the loss prevention and audit programs?
KATZ: As at most retailers, we’ve achieved a great deal of success with our exception-based reporting system, which has enabled us to be more effective in what we do, more efficient in monitoring exceptional behavior and understanding why it occurs, and dealing with that exceptional behavior that is unwarranted or unwanted.
The merchandising systems have evolved over time and have become more effective, therefore providing better information for the stores organization, the merchandising organization, and loss prevention as well.
These systems have enabled us also to improve our control environment, which has enabled us not only to hold and reduce our shortage performance, but improve our control performance throughout the company, which enables us to be more profitable.
EDITOR: I understand you have implemented a new sales audit system that is directly under your control.
KATZ: Yes. We had a homegrown system for over fifteen years. We’ve recently installed the new system. It provides not only much better auditing of data, but also exception reporting and monitoring of things such as merchandise credits, gift cards, refunds, and all of the behavior that loss prevention typically wants to see. Were in our first few months and its working well. We’ve gone through advanced training for our sales audit department associates, and were really starting to reap the benefits of it
EDITOR: How long did implementing this system take?
KATZ: We started the process two years ago…determining what we needed, what was on the market, and, most importantly, considering the timing that would work well for the transition, knowing that wed have to avoid holiday and other peak times when we could not take the risk of disrupting our sales reporting.
Our director who over sees the sales audit department as well as the sales audit manager, in conjunction with our IT department, evaluated what was on the market, evaluated our business needs, and, jointly chose the system and developed the implementation plan. Typically, the user department drives the effort and has the responsibility for it, and IT is an active partner to ensure that it works and is implemented effectively. We’ve found that if IT is the driving partner, you don’t have the ownership you need to make it work.
EDITOR: One of the factors that you did not mention in talking about fighting the shrinkage problem is EAS.
KATZ: We do not use EAS at all. Never have.
EDITOR: How have you been able to manage when so many others feel they must have an EAS program?
KATZ: I get asked that frequently at industry meetings and conferences. We had looked at it many years ago and thought that there might be a selective use for it, but the decision was made that it was not appropriate for our business. We felt we needed to find a better way to deal with the problem. So, we don’t use cables, chains, or mirrors either. We use sales associates and customer service…a somewhat unique concept. It gets a little more challenging when business is difficult, because hours on the selling floor flex with the business. But, that is our focus.
Our results show that we’ve been successful with this approach. We’ve worked with the stores organization to make the sales and loss prevention efforts one, not two separate programs. We learned a long time ago, if you have a separate LP program, when things get difficult and available time get short, the LP program is going to get cut. It has to because sales come first.
So, we’ve worked to embed the loss prevention efforts into their selling skills. We constantly reinforce the fact that if you are effective in preventing it from being stolen, you can sell it; you cant sell what you don’t have. If you look at where the most susceptible places for external theft are in a retail environment, to me that’s the front of the store and the fitting rooms. Those are two of the areas we work the most on selling skills with our programs, because we believe a customer is most conducive to selling when she is entering the store and while she’s being helped in the fitting room. And, if you greet the customer properly when she enters the store, we think the honest customer will be much more at ease and the potential thief less likely to steal.
EDITOR: As the audit leader of your company, you have been very involved in the whole issue of Sarbanes-Oxley. Apart from internal audit, is there a role that the LP executive should play with Sarbanes-Oxley compliance?
[EDITORS NOTE: The Sarbanes-Oxley Act of 2002 was enacted by Congress in the after math of the corporate financial scandals of companies such as Enron, Global Crossing, Tyco, and World Com in an effort to protect the interests of share holders and employees. The legislation contains significant reforms for public companies centered around financial record keeping, auditing, and reporting. Among other things, the act places the responsibility for financial compliance on a company’s board of directors and senior executives with associated criminal penalties for noncompliance, fraud, and conflicts of interest, requires ethics programs, and protects whistle blowers. The response to Sarbanes-Oxley has had significant impact on corporations financial organizations, including internal audit.]
KATZ: I believe there is an active role that the LP leader should play in any public company’s Sarbanes-Oxley efforts. Right now, everyone is focusing on section 404, which is the assurance of internal controls over financial reporting because certification to this has to be included in annual reports starting after November 15 of this year. The act defines internal control over financial reporting and lists several requirements, including …provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition or the registrant’s assets that could have a material effect on the financial statements. When you think about it, isn’t that what loss prevention does? Its an area that I think is getting underplayed in the loss prevention arena. I believe there is a bigger responsibility loss prevention should take in ensuring that the proper controls are there so that when a company does their Sarbanes 404 certifications, they can attest that the proper controls are in place and that LP is a part of those controls. One of the difficulties of Sarbanes-Oxley is that everything has to be documented. Many companies are finding that as they take actions and do things, they don’t necessarily document it. Loss prevention is one area where many of LPs activities are not necessarily written up, reported, verified, and signed off. I think loss prevention will have to better document what they do to help the 404 efforts within their companies
EDITOR: We’ve heard LP executives say that from an LP standpoint, they only need to be concerned about making sure there’s a hot line in place. You are suggesting that loss prevention needs to do more than just that.
KATZ: I’m not saying that LP should be the leading proponents, because its appropriate that the financial area or the corporate internal audit area take the lead. But, certainly the controls within the stores and the merchandise controls relative to shortage prevention are an integral part of it. Secondly, there are components of Sarbanes-Oxley that deal with fraud prevention and certainly loss prevention should be an active participant there as well.
EDITOR: Thats a much more encompassing view than a lot of people hold on Sarbanes.
KATZ: While it may work with the narrower definition, if a company wants to get something positive out of Sarbanes Oxley, rather than just performing the work that’s required for the government, I think they need to look at broadening the role beyond financial people to include loss prevention, the merchants, and the stores, because they again are an integral part of the control aspect of the company
EDITOR: If a director of loss prevention is reading this and he or she hasn’t been involved in any kind of Sarbanes-Oxley activities, what would you recommend they do?
KATZ: To ensure that they’re working within the culture of the company, I would suggest that the person contact the executive responsible for their Sarbanes-Oxley efforts. Number one, they need to understand the approach the company is taking to Sarbanes. And number two, the LP executive should in form the executive of what they might be able to contribute. If there is some contribution that loss prevention can make, the company will gain that much more in its control environment and efficiency of operations. So, I think it starts with just initiating a conversation.
EDITOR: You have had a rather distinguished career in supporting the LP industry, especially through the National Retail Federation (NRF). What has that meant to you personally, and how have you felt you’ve been able to make a difference to the profession?
KATZ: I hope I’ve been able to make a difference. Honestly, its a little selfish because I’ve enjoyed it so much. Number one, you get to interact with some of the most intelligent people in the industry, which is always stimulating. And number two, all of us like to be heard when we have ideas, and the NRF is a great vehicle for that. The LP advisory council is there to aid the NRF in promoting, developing, and growing the loss prevention industry. Even those efforts have grown over the years. Years ago the primary focus of the advisory council was the annual conference, which were very proud of because its the largest retail loss prevention conference in the world. We’ve broadened our responsibilities and our participation in other arenas, such as professionalism, professional development, education, and industry initiatives. One of our focuses right now is to see what we can do to attract more good people into the industry through college or other educational programs.
EDITOR: If you were speaking to a group of young people considering a career in retail loss prevention, what would you say?
KATZ: If you want to know what you’re going to do every day, don’t go into loss prevention. If you want to be challenged, understanding there’s going to be frustrations and long hours, and you want to use your initiative, its a phenomenal field because it has a lot of latitude in what you can do. The one cave at I would tell anyone, you had better like dealing with people because that is the skill you have to bring to this business to be effective in dealing with people.
EDITOR: You also have a reputation as being very active in charitable organizations. What has that meant to you?
KATZ: I believe you have a responsibility to give back to the community that you live and work in. We as an industry, Im proud to say, have become very active in taking that approach in conjunction with our annual convention. Through the event leadership of Gus Downing, we hold an annual golf outing that benefits the Make-A-Wish foundation in the city hosting the conference. Its hard to say No to kids. I think its one of the reasons that we chose that charity. Its a good feeling when I can see the industry presenting a check like we did this year for $70,000 to the local foundation knowing that’s going to provide fifteen to twenty wishes to kids fighting life-and-death battles. Activities like this help us all keep things in perspective.