Each day businesses throughout the United States fall victim to fraud. The perpetrators range from front-line employees to upper management, and unfortunately, the hard truth is that fraud is on the rise. That means business owners need to be even more diligent when creating a system of checks and balances that will take away the opportunity for employees to steal.
A recent KPMG Fraud Survey found that organizations are reporting more instances of fraud than in prior years and that three out of four organizations have uncovered fraud. Moreover, small business owners often get hit the hardest. The Association of Certified Fraud Examiners (ACFE) reported that small businesses have a higher fraud rate than larger companies, and companies with less than 100 employees lose approximately $155,000 each year as a result of fraud.
“The biggest mistake is someone who thinks fraud only happens to big business, but small businesses are just as susceptible to fraud as large businesses,” said Allan Bachman, a certified fraud examiner and education manager at ACFE. “The person who commits the fraud is always the person you least suspect, whether it be a son, a relative or a trusted employee,” he said.
Darren Schulte, NATSO’s vice president of membership, said he has heard from several truckstop and travel plaza operators who have uncovered fraud at their locations.
“One NATSO member discovered that their accountant had stolen hundreds of thousands of dollars over the period of several years. They uncovered the fraud by chance when the accountant had an unexpected absence,” Schulte said. “I’ve also heard from members who had members of their own family take from them. That is why checks and balances should just become standard procedures that are implemented throughout the organization.”
Pinpointing Fraudulent Activity
Fraud occurs wherever a person sees an opportunity. Those at the management level may have more opportunity, but a regular line employee might see opportunities and have motive.
“ATMs, video poker, arcades, showers, payphones and laundry are all areas operators should pay attention to,” Schulte said.
The challenge with uncovering well-organized fraud is it can be hard to spot. “Employees who are stealing often know what they’re doing and exactly how to do it. In some cases you’ve got to be somewhat familiar with accounting to see what they’ve done,” Schulte said.
For example, one NATSO member explained to Schulte that their accountant recorded cash entries from laundry and payphone revenue in the Profit and Loss Statement (P&L). Then, when a customer payment came in, the accountant would make an entry for it but later discount it to account for the amount he had stolen. Because the entry had been made, no one was checking to make sure the money had actually made it to the bank.
Schulte said it is worth it to have multiple employees collect and count cash from payphones and laundry. It can then go in an armored car to the bank rather than letting an employee deliver the funds.
“Operators should also run reports on ATMs daily and open the machine and spot count the money. Plus they’ll want to have multiple people verifying the ATM reports and related bank statements,” Schulte said.
“Anytime something gets to be a one-man show, it is more likely the person is covering up something,” Schulte said.
Creating Checks and Balances for Front-Line Employees
While losses at the management level can often be greater than those caused by front-line employees, operators should institute checks and balances at all levels, Bachman said.
“Fraud occurs wherever a person sees an opportunity. Those at the management level may have more opportunity, but a regular line employee might see opportunities and have motive,” Bachman explained.
With cashiers, the risk is almost always related to cash in the drawer.
“One of the things you want to look out for are voids, where a transaction appears to have taken place and then no longer takes place,” Bachman said. “If a customer doesn’t take the receipt, the cashier can grab it, write void on it and take the cash.”
“It is a few bucks here and a few bucks there, but it adds up to a lot of money,” Bachman said, adding that as a best practice, controls should be in place where voided transactions are accounted for and signed off on by another person.
Operators should also make sure registers balance and should check them periodically. “Most often, people who are stealing from a cash register don’t put it in their pocket. They leave it in the cash register and then gather it up at the end of the day,” Bachman said. “A quick check of the cash register is a good idea. Walk up to the cashier, hand her a new register box with just $100 and pull the register tape. Now that person is dead in their tracks.”
Schulte said, “The average cashier who is stealing from you is taking $250 in retail sales daily.”
Like the cash at ATMs, phone and laundry facilities, cash used to purchase copies, faxes and showers also poses a risk. “You have a lot of areas where the cash is not secured and you need somebody monitoring that. You’ve got to have someone double-checking the numbers,” Schulte said, adding that operators can watch for trends that may help them spot fraud.
For example, Schulte said, if operators pay employees every two weeks, they may start seeing that laundry revenue is really strong the first week of the month and then drops down the following week. This could mean employees are stealing to make ends meet between paychecks, he said.
Operators often see sales decline during the holidays, but Schulte recommends operators monitor fuel gallons to see if sales are decreasing along with a shift in gallons or if dishonest employees are stealing from the till and then blaming it on slower traffic.
Lottery sales can also pose a risk. Schulte said he has seen cases where employees would scratch off tickets themselves, hoping to find a winner, and then would pay for the tickets by stealing from the register.
In a similar vein, Bachman said, “With lottery, you have a cash transaction. You have to be vigilant that the cash and transactions match up.”
Within the restaurant, fraud can occur in several ways and methods of fraud in the foodservice industry can vary by employee. “If it is the kitchen staff, it may be someone taking food home. If it is on the front side, the wait staff may be falsifying receipts, charging someone for a food item that is $20, but it was really $15, then pocketing the $5, or it may be that the wait staff says there was a walk out, but there wasn’t.”
Bachman suggested managers periodically spot-check tickets with what is in the register.
When it comes to spot-checking, Schulte recommended that operators be consistent. “Employees have to know you’re checking it and you have to address the issues you’re coming across—both the good or the bad,” he said. “If it isn’t spot audited, there is always an opportunity for theft to occur.”
Training Employees to Fight Fraud
While employees may be your biggest point of vulnerability when it comes to fraud, they can also be your first line of defense.
Corey Berkstresser, general manager for Lee Hi Travel Center, said he trains employees to be vigilant on returns. “People will buy something new, like a new CB, put it in their truck, put the old one back in the box and bring it back,” he explained. To ensure customers are returning the actual product they purchased, Berkstresser said he trains cashiers to check the serial number on the unit to ensure it matches the number on the box. “If you don’t and you try to send it back, your vendor knows what he is doing and will reject it,” he said.
Simply raising awareness is another great step toward minimizing fraud. “It is always good to be vigilant. A manager has a lot of responsibilities and distractions, but they need to be alert to the possibility that it could happen to them,” Bachman said. “A manager can make sure that everyone understands that fraud and theft won’t be tolerated under any circumstances and that it will be prosecuted criminally and they will civilly go after the person.”
Because some level of fraud is inevitable, some operators invest in insurance policies that can help minimize damages from fraud.
Ultimately, Schulte said, the best defense against fraud often is for operators simply to understand it can happen to them.
“You don’t want to believe your cashiers or your people steal from you, but the truth of the matter is that they do,” Schulte said. “A waiter is paid $2 an hour plus tips. Most of them honestly are living below the poverty line. All of us would say I wouldn’t steal, but the truth is that if our family were starving, we may think differently.”
10 Checks and Balances to Reduce the Risk of Fraud
Darren Schulte, NATSO’s vice president of membership, said operators will never eliminate fraud completely, but their goal is to get it as close to zero as possible.
“In any business you have a small group who will never steal, one group who will always steal and another group—the largest—that will if the opportunity is there,” he said, which is why removing the opportunity is key.
A system of checks and balances can ensure no one person has control over all parts of a financial transaction and that accounts are reconciled every month. Here are 10 ways to minimize your risk of fraud.
1. Ensure the person who keeps the books is not the person who reconciles the statements.
2. Require purchases, payroll and disbursements to be authorized by a designated person and signed off on by a member of management.
3. Separate cash-handling functions from record-keeping functions. Also separate purchasing functions from payables functions.
4. Run random audits or have a third party audit your books once a year, in particular for bookkeepers or employees who have access to financial records and documents.
5. When opening mail, endorse or stamp checks “For Deposit Only” and list checks on a log before turning them over to the person responsible for depositing receipts. Routinely reconcile the incoming check log against deposits.
6. Require employees within the accounting department to take vacations.
7. Review accounts payable by checking cash disbursements and payments to ensure employees haven’t set up fictitious, phantom vendors; expenditures are related to agency business; signatures are by authorized signers; and endorsements are appropriate.
8. Reconcile bank accounts every month and require the reconciliation to be completed by someone who doesn’t have bookkeeping responsibilities or check-signing responsibilities.
9. Initial and date the bank statements or reconciliation reports to document that a review and reconciliation was performed and file the bank statements and reconciliations.
10. Conduct unannounced cash counts for safes, registers, ATMs, etc.
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