Employee fraud is an issue that can affect any business, but due to the transient nature of hospitality sector workforce, it is a problem that many restaurant operators experience. According to Action Fraud, between 2017 and 2018, UK businesses reported losses of £88m due to employee fraud. In order to mitigate the potential financial and operational risks posed by employee fraud, it is important for restaurant operators to understand the factors that influence it, how to detect fraudulent activity and the best measures to prevent it from happening in the first place.
What is employee fraud
Workplace fraud is the deliberate deception by an employee to secure an unfair or unlawful financial or personal gain. It can range from simple petty criminal activity, such as staff helping themselves to a bottle of wine from the cellar or cash from the till, to more advanced ‘offsite’ fraud, such as setting up dummy invoices from bogus suppliers with payments made into fraudsters’ bank accounts.
Hospitality businesses can be particularly at risk from fraud because they work with multiple suppliers, which can shift seasonally. This makes it easier for fraudulent employees to use “smoke and mirrors” to hide their activity, masking it amongst the vast number of transactions with a range of suppliers. What’s more, frequent changes to the workforce due to seasonal demand and shift patterns can add to the confusion.
What influences fraud?
A number of factors can affect the likelihood of employee fraud occurring in a restaurant, however Donald Cressey’s 1950s hypothesis simplified these into three main categories: pressure, opportunity and rationalisation. All of these factors need to be in place for fraud to occur.
The first and perhaps most influential element is pressure, which provides employees with the incentive to carry out fraudulent activity, and typically takes the form of personal finance difficulties, such as debts adding up, or simply struggling to make ends meet. Beyond personal pressures, some hospitality employees may also feel under ‘corporate’ pressure to deliver results for the business, such as those in the finance team.
When experiencing pressure, an employee considering fraud will then have to identify the opportunities for them to do so. In this stage, they will recognise the course of action by which they can abuse their position to relieve the pressure they are experiencing. Following this, they will then try to justify their dishonest actions of carrying out fraud in the rationalisation stage, such as not getting paid enough or viewing smaller fraudulent transactions as inconsequential.
To manage fraud, companies should look to relieve pressure where possible; minimise opportunity by ensuring sufficient internal checks are in place; and target rationalisation by presenting the company’s success as something all employees can benefit from.
Identifying red flags of fraud
Despite computer systems and technological advancements becoming more adept at detecting fraud, petty and ‘back of the van’ fraud remains a tricky problem for these systems to identify. It is therefore valuable for restaurant operators to be able to recognise any common red flags of fraudulent activity.
Common indicators of fraud can be as simple as stock going missing or cash not adding up in the till. However, these could also be mistaken for day-to-day errors so it’s important to have systems in place to monitor for a regular pattern of activity. What’s more, monitoring the books for unusual numbers can prove useful for spotting fraud – many fraudsters will attempt to make figures look random, but often create unconscious patterns within the data, for example by repeating numbers or using figures never ending with a zero, although this can only be sensibly identified by a computer system.
Restaurant managers can also look out for red flags in their employees’ behaviour that indicate illegal activity is taking place. Identifying staff that may be living beyond their own means can often suggest that they are partaking in fraud, whilst those who are experiencing financial difficulties, or divorce and family problems, may be at a higher risk of committing fraud. Additionally, staff with an unusually close relationship with a particular vendor or customer, as well as those that display unwillingness to share their duties over certain tasks, may well be involved in fraudulent activity.
What are the key preventative measures?
Whilst it is important for restaurant owners to be able to identify when fraud is taking place in their business, the best way to manage the issue is by preventing it in the first place.
Important measures that restaurant managers should consider include:
- Good internal controls: internal controls ensure the integrity of a business’ accounting records, and can both deter and detect fraudulent activity. This could be through the segregation of duties, for example, ensuring that employees do not complete tasks on their own or without supervision from another member of theteam. Careful scrutiny of accounts and records is also an important aspect of internal control and key for preventing fraud,
- Know your employees: keeping a thorough record of employee (and supplier) details, as well as carefully observing their behaviour, can help prevent any cases of bogus supplier invoices or ghost employee fraud.
- Seek expert advice: certified fraud examiners or accountants will be able to help a restaurant business put policies in place designed to prevent employee fraud, and they can also audit internal control techniques to ensure that fraud does not take place.
Whilst employee fraud is common-place in the hospitality sector, being able to recognise any red flags and understanding risk factors that influence fraud can enable business owners to identify criminal activity early on. Working alongside experts well-acquainted with identifying fraudulent activity can also help put the appropriate preventative measures in place to stop fraud in its tracks and avert financial, as well as reputational, damage to the business.