“Restaurant Sustains Losses Due to Fraud” is a headline no one wants to be the subject of. Unfortunately, it is a concept we hear and read about in the news on a regular basis. What rarely gets published is which industries are more at risk. Without knowing about trends in a specific industry, it is easy to dismiss these fraud cases as someone else’s issue. Read on for an exploration of fraud in the restaurant industry, including types of fraud and prevention techniques.

Fraud in Restaurants

The answer to the question, can fraud really happen in my restaurant business, is yes. Fraud can happen in any industry, but it is actually quite common in the restaurant industry. This is due to the fact that restaurants function with large staffs that include multiple people with access to cash/payment information and important business and customer information. These facts, coupled with the reality that the workforce is typically split into multiple shifts in an environment with high employee turnover, create fraud risks that are difficult to mitigate.

Types of Typical Restaurant Fraud

Vendor fraud can involve things like billing schemes and check tampering, which are both characterized by manipulating documents for a person’s benefit.

Fraud can include activities like undercharging scams, time theft and wrongfully voided transactions. Wrongfully voided transactions occur when an employee cancels or deletes a transaction but still charges a customer for the full order. The server can then take the money for the voided part of the transaction. Undercharging is similar to voided transactions, but rather than canceling an item, the employee can simply input a more expensive item into the POS system but serve a cheaper item and pocket the difference. Time theft can actually occur in any industry, but it is often seen in the restaurant industry when employees take extra breaks or if they clock in too early or too late.

Preventing Restaurant Fraud

Internal control weaknesses are the root cause of many frauds that occur in any industry. Nearly half of frauds examined by the Association of Certified Fraud Examiners (“ACFE”) could have been prevented or detected earlier by stronger internal control measures. For over half of all cases examined, lack of internal controls or override of existing controls were cited as the reasons that enabled the fraud to occur.

The best defense is to implement, maintain, and monitor a system of internal controls which include:

  • Running voided transaction reports from the POS system regularly and investigating or inquiring about higher-than-normal transactions;
  • Checking inventory often with an automated inventory software;
  • Implementing effective scheduling using software that enforces clock-in and clock-out rules;
  • Segregation of duties when dealing with vendors to help prevent any kickback schemes;
  • Closing routines that make it clear to employees that there is significant oversight on charges, cash handling etc.

Hotlines Are Valuable

Finally, having reporting hotlines available across the business may allow for a fraud to be prevented or detected before it can cause irreparable reputational and transactional damage. According to the ACFE 2022 Report to the Nations, fraud tips account for 42% of all fraud cases being detected. Of this 42%, more than half of the tips are from employees of the victim organization. Studies show that organizations with hotlines detect fraud more quickly and have lower losses than organizations without hotlines.

Reach out to your GBQ advisor for help strengthening your system of internal controls or implementing a fraud reporting hotline at your organization.

 

Article written by:
Abby Dickey
Senior, Forensic & Dispute Advisory Services

 

« Back