6865 Windcrest Drive Suite 100 Plano, TX Main: w w w. C o r n w e l l J a c k s o n. c o m

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1 Protect Your Restaurant from Employee Embezzlement By Scott Bates, CPA Mitigating the risk of loss in restaurants through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restauranteurs. We review the key areas for employee embezzlement and provide guidance on limiting loss with proper checks and balances. In 2015, Texas reported a 4.8 percent growth rate in restaurant sales, one of the highest in the nation. Restaurant employment grew by 22 percent Windcrest Drive Suite 100 Plano, TX Main: w w w. C o r n w e l l J a c k s o n. c o m An Independent Member Firm of BKR International. Firms in Principal Cities Worldwide.

2 Texas is experiencing one of the highest growth rates in the country for restaurant sales, according to a 2016 survey by the National Restaurant Association. However, members cited the cost of food and the ability to build and maintain sales volumes among their top concerns. Restaurant owners and managers are always looking for ways to reduce overhead costs while keeping their prices competitive for the market. A hidden contributor to overhead costs and lost margins is embezzlement. If food or money walks out the door consistently because of employee theft, it needs immediate attention. Anyone who has worked in a restaurant has probably witnessed questionable behavior not just from the patrons. History has shown that some employees from the line cooks to servers and management can demonstrate unethical and even criminal behavior when presented with an opportunity to put a little extra in their pockets. It is up to management to put safeguards in place to reduce those opportunities. Common types of theft in restaurants include: Food theft from deliveries or freezers Prepared food and beverages given to patrons (unticketed) Theft of equipment and supplies Pocketed cash for undocumented orders Patrons overcharged and the difference pocketed Misuse of discounts, reward programs or coupons Fake accounts payables Underreporting daily receipts Underreporting of earnings to franchisor and investors Theft of recipes, processes or intellectual property Page Two

3 As an owner or franchisor expands to more than one location and relies on management, the risks of theft can increase. The impact of theft over time can be exponential, including a lower return on profits, an inability to reinvest in the business or provide employee benefits as well as difficulty recruiting and retaining staff. Restaurant communities tend to be small, close-knit groups who can quickly identify red flags with regard to a restaurant s ownership or management. Reputation is critical to keep top talent and attract patrons. Let s address each of these risks with solutions that incorporate a combination of automation and sound operational controls. Theft of Food/Beverages/Supplies Stealing food, beverages and supplies from restaurants can be coordinated by employees or in combination with vendors. There is outright stealing of food from the inventory, but there are also instances where vendors will agree to short shipments or deliver lower quality food while providing kick-backs to staff involved in ordering or inventory. Free meals and drinks given to friends and family outside of alotted comps are another form of food theft. Employees also may walk away with supplies and quality equipment. At a minimum, employees may graze too much while on duty. To protect against food and beverage theft, there are several precautions restaurant owners and management can take: Regular stock checks, performed at unpredictable times or right before deliveries Comparison of purchase orders against deliveries at the time of delivery Monitoring of bartender habits when pouring drinks for consistency in volume Review of comp practices against alottment Policies enforced on employee meals and break habits Security camera monitoring Page Three

4 There is a big difference between babysitting staff and developing a workplace environment in which employees are engaged in loss prevention. Restaurant owners and managers need to communicate with all employees about the costs of food loss, including costs passed on to patrons in the form of increased prices or even removing popular but pricier menu items. Increased menu prices or menu changes may reduce customer volume as well as tips. Another consequence of theft? Management can reduce hours per employee. Theft at POS There are many ways that employee theft can occur at the point of sale. Automated systems can reduce some loss, but not all. Common forms of theft at POS include cash taken from the register, voiding ordered items, dropping sales or improperly ringing up items and inflating tips. At the bar, patrons may be charged for premium drinks and served well drinks with the bartender/server pocketing the difference. Noticing lower profit margins even with the same number of meals and drinks can be a red flag that receipts are not matching sales. More subtle signs of theft can be a change in employee morale as honest staffers witness others taking advantage of the system. More restaurants are transitioning to automated point of sale software programs, including programs that can be run from tablets as servers circulate. This eliminates data inputs to a central POS kiosk. The advantages of automation for loss prevention include the ease of tracking orders by employee ID (no more badge swiping), more transparent payment tracking against orders, and even integration with accounting and inventory systems. Tracking tip records can also uncover theft if percentages are higher than the industry average of 5-15 percent, or higher than historically at the establishment. As employees learn systems, there are ways to get around safeguards. For example, many employee thefts occur through discount or loyalty programs, in which the employee inputs a discount for the customer but the customer pays full price. Delaget, an expert in loss prevention, found that four in 10 discount codes are fraudulent. The most common discount theft was manager code theft. Some solutions offered for this type of theft included monitoring discount codes through the POS system as well as instituting a manager discount policy and including a fingerprint (biometric) security feature. Watch for changes in employee behavior such as defensiveness or acting secretive. Also, if your prices haven t changed, but customers seem to be complaining about price hikes, this could signal fraudulent price inflation at the POS. Page Four

5 Theft in Accounting When most business owners think of theft, they think about the back office functions. In this area, the thefts are likely more elaborate and damaging to the operation. Restaurant closures due to employee theft are most often caused through extensive management or ownership fraud. The person responsible for end-of-day reconciliations has one of the greatest opportunities to manipulate voids, cancel checks and perform other register manipulation leading to thousands and sometimes millions of dollars in loss over time. More elaborate accounting fraud schemes occur through underreporting earnings on the balance sheet or setting up fake accounts payable. Small and infrequent deposit losses also add up. Cash transactions are also a big source of loss when not monitored regularly against petty cash reconciliations. Cash is the most coveted form of theft, particularly for employees who suddenly experience an outside issue or concern that requires quick payment. Bleeding the till should include certain safeguards, such as sealing cash in an envelope with the manager s name written across the back or moving cash when there are few employees around. A strong loss prevention program should include a combination of proven automated technology, regular reports and analysis and good supervision by trusted staff. Incorporating a third-party review of the books adds another layer of control and analysis that can discover discrepancies in inventory, receipts, margins and general accounting methods that require a second look. Sometimes, it s the accounting system or analytics that are hiding opportunities for lower costs and higher profits. Managers may not be tracking the right KPIs or comparing A to B in a way that indicates losses. Incorporating better processes to leverage information from the restaurant s POS and bookkeeping systems can identify operational improvements that support cost and theft reduction. For example, review of franchise and sales tax rates as well as permit and licensing fees can reveal overpayments. Page Five

6 Theft of Intellectual Property One area of theft not always talked about is a loss of intellectual property. Again, in close-knit restaurant communities, owners and staff want to protect proprietary processes, recipes and even certain aspects of branding that make the overall restaurant experience unique. Analyze the areas of the business that add the most value or profit, and look for ways to protect those assets. There is a fine line, however, between encouraging creative development in the kitchen and limiting ownership of that creativity by staff such as head chefs. Each situation is unique and can t be covered by generic nondisclosure or confidentiality agreements. But it is worth the conversation to maintain a competitive position in your market. Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation. Page Six

7 Scott Bates, CPA, is a partner in Cornwell Jackson s audit practice and leads the Go and Grow business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries. *Business services associate, Zach Seay, contributed to this article Windcrest Drive Suite 100 Plano, TX Main: w w w. C o r n w e l l J a c k s o n. c o m An Independent Member Firm of BKR International. Firms in Principal Cities Worldwide.