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Does your hospitality business allow employees to handle either cash or inventory? If you answered yes, then your business is susceptible to employee theft. The hospitality industry has an enormous amount of cash sales transactions and high industry turnover rates so internal controls are important. Most theft within the hospitality industry is repetitive employee theft of small amounts, which quickly add up to a significant impact on the bottom line. The best way to prevent employees, who may be tempted to line their pockets, is to reduce temptation with highly visible prevention tactics and proactive internal controls.
 
There are several areas susceptible to fraudulent activities in the hospitality industry, but the three highest risk areas are:

  1. Cash
  2. Inventory
  3. Payroll/Accounts Payable 

To mitigate the risk of fraud and theft in these areas, it is important to have procedures in place to prevent your hospitality business from suffering negative impacts from employee actions. Here are procedures and controls all hospitality businesses should have in place to prevent fraudulent activities:

Cash

Cash is one of the easiest things for dishonest employees to steal from a business. Tips to prevent this from occurring:

  • Ensure there is segregation of duties between who is counting at night and who is opening in the morning and making the morning deposit.
  • Start each shift with a predetermined server and till floats.
  • Reconcile the daily deposit reports with what is actually deposited at the bank. Compare this to the point of sale reports.
  • Limit the amount of people allowed to sign checks and only allow payments to approved vendors and for approved invoices. 
  • Prepare monthly bank reconciliations and verify all deposits and checks are accounted for. The person making the deposits SHOULD NOT be the person preparing the bank reconciliations. 

 
Inventory

Stealing inventory from a workplace and reselling the inventory to a third party is another common fraudulent activity. Internal controls to prevent inventory theft:

  • Restrict preparation of food and beverage items until ordered through point of sale system.
  • Supervise delivery of inventory and thoroughly check an order to ensure quantities ordered match what is being delivered.  
  • Limit access to food inventory storage areas.
  • Organize inventory so it is easy to make a quick physical inventory count. Making a physical inventory count monthly and comparing the count to the point of sale inventory reports may help ensure all inventory is present and detect theft.

Payroll/Accounts Payable

This form of fraud is intricate and involves someone in the human resources department or a payroll employee with access to generate fictitious employees or vendors and generate fraudulent checks. This is a risk hospitality businesses may see if there is not a proper amount of segregation of duties. Ensure the roles of each employee matches their access to the payroll system and have payroll registers reviewed before processing by an individual who did not prepare the payroll. Have a different person personally hand out paychecks to each employee at least once each quarter.

How Much Do Internal Controls Cost?

Integrating internal controls into your hospitality business’ processes does not need to mean severely increasing the overhead charges. Small tasks can be introduced to limit risk and use minimal time. An accountant may be necessary to play a key advisory role in helping your business design and implement internal controls.

Smith Schafer is a recognized leader in providing accounting and consulting services to the hospitality industry since 1971. We have a team of experts, focused on working with the hospitality industry, and committed to helping our clients succeed. If you have questions about implementing or improving internal controls, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.

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CHECKLIST: HOW TO REDUCE FRAUD IN YOUR HOSPITALITY BUSINESS

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