Withum Fraud Detection and Prevention

Fraud Detection and Prevention for the Hospitality Industry

by MAUREEN DECICCO, CPA, PARTNER & NICOLE LYONS, CPA, PARTNER

Fraud and theft are prevalent issues within the restaurant and hospitality industry. Many restaurants and hotels have large staffs, giving multiple people access to registers and inventory. Coupled with alternating shifts and employee turnover, fraud can be detrimental to small businesses if not monitored closely. Below are tips to help business owners detect and prevent fraud.

Behavioral Red Flags Displayed by Perpetrators:

Keep an eye out for suspicious behavior. These red flags could be the first warning signs if you are subject to fraud.

1. Living beyond means

Is your employee buying expensive cars, going on luxury vacations, flaunting their ability to pay (e.g., offering to take other employees out)?

2. Financial difficulties

Are there hardships discussed with other employees that may lead to the propensity to steal? Is there a necessity for the employee to need additional funds?

3. Unusually close association with vendors, customers, other employees or management

Could these relationships possibly lead to stealing time or running a fraud scheme?

4. Excessive control issues or unwillingness to share duties

» Is someone always wanting to be on-site at the end of the day to potentially manipulate receipts or create an opportunity for larceny by stealing cash from daily receipts before deposited into a bank? » Is someone always insisting on handling vendor disbursements, possibly to alter documents?

5. Unusual irritability — suspiciousness and defensiveness

Does something seem “off” about an employee’s behavior? When a question is raised about a procedure performed, do they seem defensive when you pose a critique?

6. General “wheeler-dealer” attitude involving shrewd or unscrupulous behavior

Is a person exhibiting unethical behavior? (Keep in mind that those that engage in unethical behavior influence others to participate in similar behaviors.)

Fraud Prevention Techniques:

Implementing specific initiatives and techniques can help prevent and detect opportunities or actual occurrences of fraud. Please note that some of these techniques involve management/owner control. In contrast, others include employees in the process whereby oversight and controls are even more critical to reducing fraud risks at the employee level.

Withum is a forward-thinking, technology-driven advisory and accounting firm, committed to helping clients in the hospitality industry be more profitable, efficient and productive in the modern business landscape. For further information about protecting your business, contact Maureen DeCicco (MDecicco@Withum.com) or Nicole Lyons (NLyons@Withum.com) or visit Withum.com.

Background Checks

Below are different types of available background checks, but you may want to prioritize and tailor different aspects of an individual’s background. • Employment history. • Criminal checks. • Reference checks. • Education verification. • Credit checks. • Drug screening. • Cash collections. • Minimize cash intake to minimize theft. • Where cash is collected, do register closeouts more than once a day. Move cash to a safe and have employees sign register counts. • Make bank deposits frequently. • Limit access to the cash safe. • Vendor bill payment. • Do not pay bills in cash to avoid duplicate payment error and reduce the risk of overpaying. • Utilize checks or online bill pay to create a payment trail. • Control who manages vendor relationships to reduce fraud risk and reduce the potential for kickbacks. • Match receipts to vendor invoices to ensure paying for what was received. • Food inventory Management. • Have an inventory management process in place. • Ensure there are controls for validating receipts of goods. • Liquor Management for events. • Have a policy for over-giving free drinks. • Take inventory before and after an event. • Establish reporting for the event receipts instead of inventory usage to watch trends. • Loyalty programs and gift cards. • Formalize loyalty programs for monitoring purposes. • Secure gift cards and keep inventory of gift card sales. • Make sure written certificates are numbered, log maintained and reviewed against usage and open items. • Access to banks and online bill pay. • Limit access to bank accounts and online bill pay. • Approve online bill payments before making them and review promptly. • Address cybersecurity considerations, i.e., training on phishing attempts, using effective passwords and securing your network. • Supply the owner with access to a timely review of banking activity to monitor for issues. • Petty cash. • Higher-level employees should have control/access. • Limit the use of petty cash. • Formalize reporting to replenish by requiring spending with receipts. • Strengthening bookkeeping and reporting. • Make sure weekly and monthly reporting are timely for review by management. • Use trend analyses on inventory, sales and margins to monitor.