Forensic investigations in the hospitality industry are essential for identifying and preventing fraudulent activities. The hospitality industry is a prime target for fraudsters due to the high volume of transactions and personally identifiable information (PII). This article will explore the importance of forensic investigations in the hospitality industry and the key aspects that forensic investigators consider during their work.
The hospitality industry deals with many daily financial transactions, from cash payments to credit card transactions and online bookings. According to ACFE’s 2022 Report to the Nations, businesses in the hospitality industry experienced a median loss of $55,000 before being detected. A total of 52 cases in the sector were recorded as part of the report. The volume of cash flowing through hotels, restaurants, and resorts creates an environment ripe for fraudulent activities. Without proper controls and surveillance, dishonest employees or external criminals can exploit this vulnerability, leading to significant financial losses for businesses.
As a result, forensic investigations play a pivotal role in uncovering fraudulent schemes and identifying potential perpetrators, and, by way of collaborating with our internal control assessment team, suggesting preventive measures to mitigate risks. Forensic accountants are brought in to investigate issues in various facets. There can be concerns surrounding revenue, disbursements, or vendors, and a forensic accountant is brought in to collect, analyze, and evaluate evidential matter to assist stakeholders in reaching a conclusion on the merits of concern. For instance, if there are concerns that vendor expenses on a general ledger have been altered, an analysis is performed where a forensic accountant will review the books and records of a company to determine how they are categorizing vendor payments, who is getting paid, and what services the payments are for, and compare that information against third party source documentation such as vendor invoices and bank account statements.
Forensic Investigations vs. Audits
A common misperception is that audits and forensic investigations have similarities. However, that couldn’t be further from the truth. Although both are types of service functions, an audit is a planned event and a general, basic exam of business accounts focused on compliance and the overall performance of an organization and whether reported financial results are in accordance with certain standards. A forensic investigation is a reactive, unforeseen analysis and is considered more of a targeted review around an issue or concern. It can help uncover specific facts surrounding a potential allegation of fraud.
There are two types of engagements that forensic accountants normally get involved in. A litigation engagement involves actual or potential legal or regulatory proceedings before a trier of fact, such as a judge. A forensic accountant is brought in as an expert witness or as a consultant, and occasionally as a neutral expert or a joint expert by both sides. The goal of a litigation engagement is to provide an expert opinion in a litigation setting based on sufficient data and analyses performed. The other type of engagement that forensic accountants are involved in are investigation engagements. There are no current legal proceedings or issues in an investigation engagement, but some item(s) of concern has been flagged. Forensic accountants are typically called upon to assess a specific matter brought up by company stakeholders when they want a deeper dive into certain accounts or transactions, like an analysis of expense reimbursements, for example. The company stakeholders in investigation engagements can include company management, a board of directors, an independent auditor, regulator or counsel.
Two common sectors of litigation that typically involve forensic accountants include commercial litigation and criminal litigation:
- Commercial litigation includes business disputes where the parties disagree over a breach of contract issue or potential misappropriation of company funds.
- Criminal litigation involving white-collar criminal defense attorneys, who call on forensic accountants to assist them as part of the legal team in preparing analysis to uncover certain transactions or issues with transactions on the investigation side.
Forensic investigations are critical for identifying hospitality industry fraud and, through the use of an internal control assessment team, identifying proactive measures that can be implemented to reduce risk of fraud. Hospitality businesses must have robust controls and procedures in place to prevent fraudulent activities and protect their assets, reputation and customer PII. Forensic investigators can provide valuable insights and expertise to help businesses identify and mitigate risks. If an allegation of fraud is raised as a concern by the hospitality business, a forensic investigation can assist in evaluating the merits of the claim, and, by collaborating with the internal control assessment team, structure processes that can safeguard their financial interests and ensure the long-term success of their operations.