Jonathan Perrin Q&A with Bob Dulieu of Capcon Investigations
Has fraud in the Hospitality industry increased due to the escalating financial issues caused by the credit crunch?
There are really two elements to this; firstly the awareness of fraud and secondly the fraud itself. Where there is a drop in sales caused by either an economic downturn or seasonal variations, the tendency is to focus on profit margins and this can often reveal an element of shrinkage which may be the result of fraud. The fraud may have been there all along but it is the additional attention that brings it to light. Inevitably when any individual’s personal or household expenses increase – as is happening in the current market – those individuals with a propensity for dishonesty will take the opportunity to top up their finances by defrauding their employer. There is no hard statistical evidence at this stage to show whether there is any real increase in the level of fraud in the Hospitality Industry but we have seen a marked increase in cases of fraud referred to us and I can foresee this will increase further as the crunch hits deeper and individuals are unable to repay debts.
Why is having a regular stock audit so critical to monitoring the performance of a business unit?
Regular independent stock audits are crucial in giving the management team confidence that they are achieving their margins and that cash and bankings are reconciled and handled correctly. A good service provider will also highlight areas of opportunity to improve the business, such as:
- Providing Providing relevant and accurate management information
- Reducing Reducing stock levels thereby improving cash flow
- Monitoring staff performance
- Reducing wastage
- Individual product margins
- Measuring effectiveness of marketing/promotions
- Checking security of stock
Do you believe that there is an acceptable level of 'Leakage' that a business should tolerate that outweighs the cost of stopping it?
‘Leakage’ is one of those polite terms that is often used to hide a more serious issue. In reality we are referring to theft and fraud and no level of theft or fraud is tolerable in any business. This message should be communicated to all staff clearly and in the strongest possible terms.
There are numerous cases of major fraud reported in the press that have a devastating and often terminal impact on a business; but often the impact of smaller frauds, left unchallenged, can present serious problems. As the following hypothetical example illustrates:
A junior manager with minor responsibilities is known to ‘pilfer’ small amounts of stock for his own use. His line managers are aware of this but let it go as he is generally thought of as ‘a good bloke’ who keeps his head down and doesn’t cause any problems. He is subsequently transferred to another site, where the line management are unaware of his previous nefarious activities and, as a result of a sudden vacancy, he is promoted to a more senior position. In his new position he has responsibility for Revenue Declarations and Banking. One day he accidentally under-declares revenue and under-banks by an equivalent amount leaving him with a small cash surplus on site. After a few days he realises that this has not been picked up by the finance department and so tries again, this time for a higher amount. Before long he has defraud the business of a six figure sum. If and when the fraud is discovered the business will have to deploy substantial resources to deal with the fraud; HR Managers, Accounts, Internal or external Audit, Investigators, Management time and possibly lawyers. But the impact of the fraud goes further than this. His peers and subordinates from the previous site will have been aware of his activities and noted that they went unpunished. A proportion of these will feel that if this individual was allowed to get away with it then why can’t they. So the virulent effect of one unchallenged fraud spreads through the business.
Accountants, when in charge of a business, are often accused of stifling creativity. How can well controlled systems help a business?
The mix of a cash rich business, alongside desirable product (alcohol), makes the hospitality industry particularly vulnerable to staff fraud. In addition to this, in some areas of the industry there is a relatively low paid and sometimes transient workforce with limited loyalty to their employer. Therefore, a well controlled business with regular stock and cash audits running alongside a robust fraud policy can help unit managers, owners and directors sleep soundly and allow them the time to use their flair and skill to develop the business.