Employee fraud should be a major concern to restaurant operators because it can significantly cut into revenue. Quite simply, this is an issue that you can’t afford to ignore.
There are two main areas where employees can inflict financial harm on a restaurant: they can steal product or they can steal money. Here, we will focus on the embezzlement of money that takes place when employees commit fraudulent transactions at the point of sale, such as voided checks, refunds, coupon redemption, discounts or through other creative ideas.
In one particular case, after we conducted a thorough analysis of the client’s transactional data, we identified that 6 percent of all transactions were fraudulent. Six percent is on the high end of the scale we see, but a more prevalent figure for U.S. restaurant chains is around 2 percent.
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This adds up: While every brand is different, we have seen clients recover between $40,000 and $97,000 per unit each year. That’s revenue that you have to absorb if you don’t address the issue.
Here are 10 ways you can identify employee fraud and take steps to prevent it:
1. First, consider all of the areas that are at risk for fraudulent behavior. For example: Are cashiers and waiters allowed to issue refunds or voids on their own? How are discount codes entered into the system? And how are employee meals handled? Once you know the areas that are at risk for fraud, you know where to look for issues and can devise a plan to prevent problems.
2. Restaurant managers should have a good understanding of what is happening with transactions. Managers should review transactions and look through reports to see how many refunds are being issued, how many checks are being cancelled, and how many coupons are being redeemed or discounts being offered. Look through reports at the unit level and compare to other locations.
3. As you review transactions, look for unusual activity. Compare refunds during certain shifts to see if there are any patterns, and check whether any employees have a high level of refunds or voids.
4. The next step is to investigate any patterns or irregularities you find. If you notice that a certain employee has a significantly higher level of refunds issued compared to other employees, it is time to investigate. Review security camera footage and observe the employee to see if your concerns about fraudulent behavior are well founded. If your findings are substantiated, this turns into an HR issue as you decide how you want to handle the situation.
5. At smaller chains, spot-check from each register to look for anomalies. If you run an independent restaurant or small chain, pick a few sample checks from each register to look for any anomalies. Does one register have more voids or returns over the others? Are a large number of voids taking place during a certain timeframe or meal period?
6. When employees know a fraud detection system is in place, the number of cases decreases. Share with employees that you have implemented a fraud detection system and share reports with them, so they are aware of how many times they issue refunds or void a check. Post a tally in the break room of how many voids or refunds are issued, and reward employees when the number of voids starts to trend downward.
7. Review your authorization process and revise as needed. If certain locations are experiencing a high number of refunds or voids, you may want to review the process you have for authorizing such transactions. If employees can process a void on their own, perhaps you should add a level of approval such as a shift leader or manager.
8. Rolling out cashless payments can help reduce this problem. Since most fraud occurs with cash transactions, restaurant operators find this to be another reason to use cashless payment methods. More and more restaurants are setting up online ordering or allowing customers to pay through an app on their smartphones.
9. Preventing and identifying fraud should be an everyday part of your financial management. As a restaurant operator, you should have a strong understanding of your finances and cash flow — revenue, costs, transaction data, etc. Knowing how many refunds, voids or cancelled checks are normal for your unit should be part of understanding your overall financial picture.
10. Lastly, keep in mind that restaurants with lower menu prices may be at risk for more theft. Quick-service restaurants, for example, may be at a greater risk because more customers are paying with cash, and there is a larger number of transactions taking place. Often times restaurants don’t have sufficient resources to check for potential fraudulent transactions, which makes the implementation of all or some of the above tips that much more important.
Winny Daud is director of consulting services for Revenue Management Solutions, based in the Singapore office. Daud earned her Master of Management in Hospitality from Cornell University School of Hotel Administration. She is also a trained accountant and operation auditor in the hospitality industry.
Philipp Laque is director of business development Europe and franchisee services for Revenue Management Solutions, based in the London office. Laque earned his Master of Management degree in Hospitality, International Hospitality from Cornell University School of Hotel Administration.
Update: June 6, 2016 This article has been updated to include Philipp Laque as a co-author.