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Fraud Detection and Prevention for the Restaurant Industry

Fraud and theft are prevalent issues within the restaurant industry. Many restaurants 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.

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)?

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?

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

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

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?

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?

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)

Recent divorce or family problems

  • Is there a possibility that personal turmoil may lead to fraudulent behavior?

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.

Background Checks

Below are different types of background checks available, 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

The below areas are based on management policy with employees actively involved in the process, warranting oversight by management and controls to be put in place to minimize fraud risk

Cash collections

  • Minimize cash intake to minimize theft
  • Where cash is collected, do register close-outs 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

The below areas are based upon management policy with little or no employee involvement in the process, warranting less oversight by management. Controls here should focus on preventing and detecting issues through monitoring and trend analysis.

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

Physical monitoring of location and employee shifts

  • Utilize cameras to deter employee theft
  • Using a time clock system is a control technique to verify payroll. System reports can monitor employees and provide data for clocking in late, leaving early, or not clocking in. You can also use this technique to deter employees from taking liberties, assist in managing employee time and validate that payroll paid is based upon an actual time worked.

Key Takeaways:

  • Identify fraud risks and why they occur, including attributes of employees.
  • Management involvement is crucial in preventing and detecting fraud opportunities and occurrences.
  • Always consider closing the gap on ripe areas for fraud. Check all possible boxes to ensure that restaurant operations have a control function embedded therein. Assess those business risks that would have a material impact on operations.
  • Plan, implement, review and reassess. This process is ongoing for owners and management.
  • Maintain an ongoing protocol to address and manage fraud risks, starting with setting a strong tone at the top with policies and procedures to minimize risk.
For any questions or further information, please contact a member of Withum’s Consumer Products Team.

Consumer Products

According to the ACFE Report to the Nations 2020 Global Study on Occupational Fraud and Abuse, most common types of checks are employment history, criminal checks and reference checks

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