Are Your Profits Walking Out the Door?
Fraud today is big business. The Association of Certified Fraud Examiners estimates that worldwide fraud loss could total as much as $3.5 trillion or roughly the combined gross national product of England and Australia. Fraud does not discriminate: it's a crime that is just as comfortable in smaller cash-based businesses as it is in corporate high-rise headquarters.
Take, for example, the case of the disappearing food.
Bob Smith (not his real name) was in the process of purchasing a number of chain fast-food restaurants when an examination of each location's financial information turned up something interesting: despite otherwise positive indicators, a small number of the restaurants were performing poorly. Suspicions raised, Smith reached out to get help to get to the bottom of the issue. It was a good thing that he did. It was discovered that a fair amount of the inventory was walking out the door at night that included meat, canned goods and so forth.
Solving the case of the disappearing food was the easy part, handled by simple observation (aka a stakeout). A second component of the investigation reviewed financial records of these particular locations and uncovered improper invoices and fake vendors.
"One of their vendors decided that if getting paid once for a particular item was good, then getting paid twice for that exact same item was even better," said Bill Kowalski, Rehmann vice president and director of operations and a former FBI agent.
Food service providers such as Bob can be particularly vulnerable not only to fraud such as double-billing, but cash skimming, as well. That's because there are vulnerabilities with largely cash-based businesses that other businesses -- those that largely accept credit cards -- don't face. For example, when was the last time you paid for gas with cash? Many people don't even enter the gas station anymore; they simply pay at the pump. But consider a restaurant, especially a fast-food spot where there are a number of cash transactions going on along with opportunities for employees to shave a little off the top.
Fortunately, there are several steps today's franchisees can take to minimize the risk of fraud and the damage it can cause.
Demonstrate Fair, Ethical Leadership
They might not realize it, but owners and managers are always in the spotlight, with employees carefully observing not only how they lead, but how consistently they treat all of their employees. Consider that in the case of a work environment where the leadership is dysfunctional, it's also likely that the staff is as well. Franchise businesses should lead by example every single day.
Select Managers Carefully
Someone who owns multiple locations cannot be everywhere at once, so the franchisee should take great care in selecting managers. Personally observing an internal candidate over time-if promoting from within -is effective, but a background check can increase the quality of new hires by uncovering work history inconsistencies and other red flags that eliminate some applicants in favor of more appropriate ones. Whether it is four pounds of meat walking out the door every night or four pounds of lettuce, it adds up quickly. Having the right people on your side, being able to trust them and having them enforce internal controls are all vital steps.
Establish Strict Controls
How many signatures are required on an inventory receipt form? Does your company or location offer an anonymous tip line? Are thoroughly-noted processes posted or otherwise made available to employees, and are they expected to be followed consistently? Do you have a "zero tolerance" policy in place to address issues such as theft or time card tampering? Don't think for a minute that incorporating strict controls is too militant or too harsh. You're running a business and need such controls to help you run it successfully. Besides, employees don't care about controls provided that everyone is expected to abide by them equally. Companies run into trouble when one person gets to play by a different set of rules than the others. Few things generate animosity toward management faster than that.
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Incorporating methods such as these aren't likely to overshadow either your business or your employees. On the contrary, creating a professional and fair work environment empowers everyone to concentrate on the one thing that is important to all parties: successfully taking care of customers and thereby increasing profit margins.
Fraud can really hurt a business, but the good news is that there are relatively easy and effective ways to combat it.