Restaurant Fraud & Theft – Part IV

The first three posts in this series covered fraud and theft of products entering the establishment, food theft, and alcohol theft.  Now, we’re going to look at outright theft of sales receipts.  While it’s unlikely that your servers are grabbing handfuls of dollars on their way out the door, today’s post looks at several more sophisticated methods of achieving the same result.

Many restaurants offer discounts to their guests once in a while.  Usually, these discounts are in the form of customer “comps” or “treats”.  Sometimes, customers or potential customers are given coupons to be redeemed for discounts.  Used properly, there’s nothing wrong with this practice to generate new business and reward loyal customers, but in the wrong hands, it’s the equivalent of handing out cash!

PRINTING MONEY

If you mail or deliver coupons to your potential customers, they receive the coupons, directly.  Giving out coupons in the guest check folder, at the front desk, or printed on a business card, makes them available to anyone, including your staff.  Not only can servers use these coupons to steal cash, they can give coupons to their otherwise full-paying, “regular” customers in return for a higher tip.  Unless your establishment has very strong supervisory controls, you must issue coupons directly to your customers or potential customers.

If coupons are used in your establishment, you must maintain control over all redemptions.  When a guest uses a coupon, the server must submit the coupon with the guest check to support the discount applied to the bill.  This helps prevent giving discounts that are not supported with a coupon, but what about supported discounts that really shouldn’t have been allowed?  If servers have a supply of non-personalized coupons, they can be used to “support” discounts on guest checks.  It’s difficult for a server to improperly use a coupon on a guest check paid by a credit card, unless there is collusion with the guest.

The real risk is with cash paid guest checks.  A guest, without a coupon, pays the full amount of the check.  After the guest leaves, the server attaches a coupon and enters the discount in the POS.  The server pockets the amount of the discount plus the taxes that were paid on the discount by the customer.  It may be possible to detect this type of theft, after the fact, by examining server cash paid checks.  If a server has a significantly higher percentage of coupons applied to cash checks than charge checks, you can be pretty sure this type of theft is being perpetrated. 

To catch this fraud before it happens, you’ll have to closely observe your servers as they present guest checks to customers, collect payments, and close out checks on the POS system.  You’ll be looking for checks paid in cash without discount coupons.  For these you want to make sure the check is closed out at the time of the customer payment and that no coupon discount is applied.  If servers fail to close out cash-paid checks promptly, there is a risk that the server will apply coupons later in the shift, pocketing the cash.

Many restaurants provide complimentary dinners for charities.  Rather than providing certificates with a set value, most provide letters and/or paper certificates that entitle the guest to “Dinner for Two” or something similar.  The manager should authorize all charitable donation discounts entered in the POS system, to ensure that only valid discounts are processed.  Once used, the certificates should be cancelled to prevent reuse.  Never allow staff to issue charitable donation certificates without management authorization.

RE-GIFTING

Too many restaurants still use paper gift certificates.  GroupOn and other similar companies issue gift certificates that are printed from the purchaser’s computer.  No matter how sophisticated the design, they are easily copied, to be used by others.  Dishonest staff or customers can systematically redeem fraudulent gift certificates.  By the time the fraud is detected, it is too late.

Sometimes, servers don’t even need to copy the certificates, they’re available on site.  Management must maintain control over all gift certificates, otherwise staff may gain access to them and present them as valid certificates.  It is good practice to cancel all certificates after redemption, to prevent unauthorized re-use.  A log should be used to record purchases and redemptions of gift certificates.

The best defense is the use of magnetic strip gift cards.  Ideally, these should be processed through your credit card authorization system, as offered by Moneris and others.  These systems provide better control over the issuance and redemption of gift cards. 

CHECK AND RE-CHECK

Even without a zapper cash can be skimmed from sales – the old fashioned way.  Letting servers and bartenders keep tables open after the check has been paid in cash invites fraud.  There are several variations on this one, but the most common one is to reuse a cash paid guest check with another table later in the shift.  Modern POS systems make it quite easy to split bills, allowing the dishonest server to split items on a cash paid table, into several cash checks each with an individual item, and transfer them to new tables.  Then, it is just a matter of finding another customer to purchase the previously rung in (and paid for) items.  This type of theft works well in a busy bar situation.

Well-run restaurants require manager approval for transferring items from one table to another. 

NOW YOU SEE IT…

A dishonest server collects cash to settle a guest check, claims the guests pulled a “Dine-and-Dash”, and tries to get management to cancel the entire bill.  Another variation is to claim that the customer complained about an item ordered (or the service) and use this to justify discounting or voiding items off the guest check.  Once again, if the check is paid with cash, the void can be performed after the guest pays, and the server keeps the difference.

The lessons, here, are to supervise staff to ensure all settled tables are closed promptly and never allow service staff to use discount and void keys without authorization.  Even though it is not lawful to hold servers financially responsible for walk-outs, most restaurants make their servers “know” that they will be held responsible, as a method of minimizing this type of fraud.

FINAL THOUGHTS

This concludes the current series on fraud and theft in restaurants.  Obviously, I have not discussed every tactic employed by dishonest suppliers, customers and employees.  I have tried to outline the more significant thefts and how to minimize their impact on your restaurant.  Not only is theft costly in terms of inventory “shrinkage”, it is the number one cause of assessments for “unreported sales” arising from tax audits.  If more restaurateurs knew this, they would devote more time and effort to minimizing the incidence of fraud and theft in their operations.

Restaurant Fraud & Theft – Part III

“What I like to drink most is wine that belongs to others.”
Diogenes.

Today’s post looks at alcohol related thefts once the alcohol has made its way to the coolers and shelves in the bar.  These types of alcohol theft are broad categories.  Within each there are many scams, too many to list.  As I have discussed many times on this blog and my tax blog, alcohol theft has dire tax consequences for a restaurant.  In Canada, the total cost of the theft can easily be twice the cost of the stolen alcohol.  That’s why it is so important to minimize theft in your operation.

On The Job Stress Relief

From another study, as many as 56.6% of your employees are drinking your alcohol without authorization.  On average, half of your employees are stealing alcoholic drinks from your restaurant or bar.  If there is inadequate supervision of staff during the shift, alcohol will disappear.  A water glass filled with vodka or a glass of wine served in a tea cup will not appear out of the ordinary.  A Cuba Libra looks like a Coke.  The only way you can catch these types of theft is to properly observe bar staff during all shifts.

It’s a Party!

Many restaurateurs have allowed their staff to drink after hours, at least once in a while.   Others allow their staff to drink after hours on a regular basis.  Rarely are staff charged for these drinks.  You might think that it is okay, as long as the owner is on hand to monitor drinking.  You would be wrong.  It isn’t just the cost of the alcohol consumed (or the tax liability that accrues), it is the effect of this policy on employee theft.

If you allow staff drinking after hours, there is a significant increase in employee theft from giving away alcohol to friends, customers and staff at other establishments (who will return the favour to them in the future).  Suffice it to say that almost every one of your employees will give-to-get alcohol (9 of 10).

If you do allow staff drinking after hours, stop.  If you wish to treat your staff, take them off-premises.

It’s On Me

About 2/3 of your employees will give free drinks to their friends.  You know, “it’s on me.”  Actually, it’s on you, the restaurateur.

While it is good practice to “treat” your best customers to free drinks every once in a while, it is equally important to keep track of these treats.  Even if you agree with your staff’s treats to customers, they must be supported in the event of a tax audit.  If your staff is simply giving away free drinks without recording them, you will be unable to prove the amount of customer promotions, leading to a significant tax liability.  Without any record of the “treats”, it is impossible to control your alcohol costs, making it impossible to monitor alcohol theft.  It really is worth the paperwork.

About half of your employees are guilty of over-pouring drinks to friends and regulars.  Over-pouring adds up over time and has a significant cost to the owner in terms of the cost of alcohol and tax liabilities.  In a way, it is even worse than giving away drinks.  At least customer comps can be documented for tax purposes.  It is difficult to prove over-pouring during a tax audit.  To put this in perspective, a 1.0 oz. over-pour on a 6.0 oz. glass of wine increases the serving cost of the wine by 16.67% .  A 1/4 oz. over-pour on a 1.0 oz. shot of liquor represents a 25% jump in alcohol costs! 

Keep in mind that when your staff over-pour drinks, your customers will order fewer drinks during the stay.  Customers that receive free drinks order fewer drinks too.  This means lower sales to the restaurant, and a potentially large tax bill down the road.   All these costs, so that your staff can make a few dollars of additional gratuities.  These are the most expensive gratuities ever “earned”.  It would be far cheaper to simply hand over the equivalent cash to your servers and bartenders!

If you don’t already maintain a log of customer comps (“treats”), start doing so.  Ideally, enter every order into the POS, print the guest check and discount the bill to a promotion account.  Maintain a log of the customer comps to indicate the customer, reason for the complimentary drink, date and authorization.  Keep all promo guest checks with the monthly log.

Properly train all serving staff on drink sizes.  Make sure proper measuring devices are available.  Monitor portion controls through effective supervision.

Restaurant Fraud & Theft – Part II

Part I in this series focused on fraud and theft up to the point your inventory becomes available for sale.  As we found out, lots can go wrong during the purchasing, receiving and inventory safeguarding processes.  These frauds and thefts involved uncooked food or unpoured alcohol.  Now, let’s uncork a bottle and turn up the heat.

Today, I want to discuss some of the major thefts that happen during “normal” operations.  These thefts involve cooked food or poured alcohol.  These are the ones that take place “right under your nose”.  Today’s post examines food theft.

FOOD FOR THOUGHT

Since we’re looking at cooked food, we’ll be dealing with dishonest chefs, acting alone or in collusion with other employees.

In some ways it is easier to steal food than it is to steal alcohol.  Usually, kitchens are not in plain view of most staff, management or customers, whereas bars are out in the open and subject to more supervision.  Management is usually less concerned about cooked food theft, because they believe staff won’t steal more than they can eat.  So, management spends less time supervising chefs, creating even more opportunities for theft.  Once food theft occurs, the cost is covered up within the overall food cost percentage which varies widely for reasons other than theft (portion control, waste, etc…). 

In other ways, stealing food is more difficult than stealing alcoholic drinks.  Alcoholic employees can put away astounding amounts of alcohol during a typical shift.  It is relatively easy to “hide” alcoholic consumption during a shift, and stolen drink “evidence” is quickly disposed of by, well, gulping it.  For food, it takes longer to consume the evidence and there are fewer ways to conceal it.  Just think of Dan Aykroyd hiding the salmon in his Santa suit in the movie, Trading Places.

Chefs prepare the food, but they can only eat so much during their shifts.  Instead, they must collude with other employees to turn ”their” food into something more appealing.  Here are a few interesting examples.

 

Gourmet Staff Meals

 

Many restaurants offer their employees low cost or free staff meals.  These meals are supposed to have a reasonably low food cost.  It doesn’t take long for the staff to tire of the same staff meals.  So, it occurs to them that, perhaps, something might be worked out with the chef.  Before you know it, grateful employees are enjoying gourmet staff meals, and the chefs are guzzling a few cold ones.  Without knowing it, the restaurateur is paying for not only the steaks but the ale too!

As the owner-manager, you must hold the chef accountable for all staff meals.  Each day’s meal should be listed and described.  This log should be reviewed weekly (or daily) to ensure compliance with restaurant policies.  Any deviations from policy should be authorized prior to the preparation of expensive staff meals.  It goes without saying that the manager must observe the preparation and serving of staff meals occasionally.

Free Feasts For Friends

Often, servers and bartenders will ask chefs to prepare menu items for themselves, friends and high-tipping customers, without ordering through the POS system.  Using the most favoured currency in the restaurant, the chefs are paid with drinks.  Everyone’s happy…except the owner.

Be aware (or beware) of staff members that may have drinking problems.  These are the ones that are most likely to steal and collude with others.  Don’t forget to keep an eye on employees that say they don’t drink, or at least not that often.  You may be surprised to find that they do drink after their shifts, especially if it is free!  Also, keep in mind that the majority of your employees see nothing wrong with giving free food and drinks to employees at other establishments in return for reciprocal arrangements when they go out.  Observation is the only way to catch this type of theft.

 

Dinner and a Movie  

 

Some restaurants offer take-out menus.  The problem is that the owners don’t know about it.  Dishonest chefs can prepare meals for employees at local businesses, in return for products or services - stolen, of course - from the “diner’s” store.   In one such case, a chef was feeding the entire staff, including the manager, at a local video rental store, in return for free video rentals…every week!  Other staff that may have blown the whistle on the thief were paid off with free video rentals.  Be on the lookout for employees that appear to be making significant “purchases” from local shops, where it is unlikely that they would be able to afford the purchases.

In order to combat these types of theft, management must hold the head chef accountable for all food inventory.  Analysing margins is a great tool for identifying possible theft losses – after the fact.  The only way to prevent (or minimize) theft by collusion, is through supervision and observation to ensure all employees follow proper procedures.  For example, regularly monitor servers to ensure that all items ordered are punched in and check that all plates going out have a matching order slip.

Summary

 

Today’s post covered the major types of food theft in restaurants, once the food has left the store room.  Unlike most thefts, these ones usually require some collusion with other employees.  Effectively, this doubles the restaurant’s exposure to theft.  While regular margin analyses may provide evidence of theft, it cannot prevent it.  Only proper management supervision can deter these forms of theft. 

The next article in this series will cover the theft of alcoholic drinks.

Are All Thefts Equal?

Today’s post asks, are all thefts equal?  I’ve listed four common forms of theft in restaurants and bars.  If the amount of theft is equal in each case, is the cost to the restaurateur the same?  If you think each one has the same impact on the restaurant or bar, read on.

Types of Theft

1. Employee takes or consumes food, supplies or assets without paying.

2. Employee takes or consumes alcohol without paying.

3. Bartender over-pours drinks (and under-pours others to maintain the proper cost of sales).

4. Bartender consistently over-pours or gives away free drinks.

Employee takes or consumes food, supplies or assets without paying

In this type of theft, the restaurant loses the cost of the items taken.  Pretty straight forward.

Employee takes or consumes alcohol without paying

You may think that this form of theft has the same cost as an employee taking food or supplies.  However, the cost can be quite a bit higher than you think!  Yes, you’ve lost the cost of the alcohol consumed, but you will also incur a substantial tax liability directly related to the theft.

To understand why, refer to my paper, The True Cost of Staff Theft.  The average tax cost (including penalties and interest) will be approximately equal to the cost of the alcohol taken.  It can be even more than this, depending on whether the tax authorities charge a benefit to the shareholders.

Essentially, this form of theft costs the owner at least two times the cost of the alcohol taken.

Bartender over-pours drinks (and under-pours others to maintain the proper cost of sales)

At first blush, this theft doesn’t appear to cost the restaurant at all.  While there are no sales or income tax consequences and there are no net inventory losses, the restaurant will still incur significant losses over time.

Those customers who receive under-pours may decide to take their business elsewhere, resulting in a significant, longer term loss of revenue to the restaurant.  Even though it is an indirect loss, it still costs the owner.

Alternatively, the under-poured customers will notice that some customers are receiving larger pours and demand them too.  You keep the customer, but now most customers are receiving larger pours.  The over-pouring can no longer be masked by under-pouring, resulting in a direct inventory loss as well as the related tax consequences.

Bartender consistently over-pours or gives away free drinks

Similar to the last case, this one involves the direct cost of alcohol given away in full drinks and by systematic over-pouring.  In an audit, sales and income taxes will be calculated based on the sales that would have been reported, had the missing alcohol been sold to customers.  Note that when customers are given free drinks or heavy pours, they will be ordering fewer paid drinks.  The cost to the restaurant is the full selling price of the drink that wasn’t “sold”.

With this form of theft, (a) you don’t have the cash from the missing sales, (b) you have a loss equal to the cost of the missing alcohol, and (c) you have a substantial tax liability.

The Bottom Line

You cannot afford to let theft go unchecked in your restaurant or bar.  If you think you are only losing the cost of the missing alcohol, you’re probably not devoting nearly enough time and effort to combat theft.  Failure to heed this advice could put you out of business.

Take Part in a Canadian Industry Restaurant Survey

Technomic, Inc. is seeking independent and regional Canadian restaurant owners and managers to help them with a study on the current business environment for restaurants in Canada.

If you qualify and complete the survey, you will receive an Amazon.com code for $10 (Canadian) that can be used for purchases on their website. If you prefer, this amount may be donated to charity instead. Total participation is limited, so please click on the link below today!
 
http://www.ilabonline.com/mrIWeb/mrIWeb.dll?I.Project=IND211
 

I hope you will take the time to complete the survey, so that we can improve the general lack of Canadian restaurant market information.  Once the results have been tabulated, I’ll be reporting on some of the key findings.