Internal controls are the procedures a business puts into place to ensure that assets are safeguarded, fraud is minimized, and procedures are actually followed. Any discussion of internal controls usually begins with the Fraud Triangle.
The Fraud Triangle focuses on three factors that help predict whether a person will steal. These three factors are:
- Opportunity to Steal
- Motivation/Financial Pressure to Steal
- Personal Integrity/Ability to Rationalize Theft
Motivation/Financial pressure to steal can be caused by:
- Large debts and/or pending bankruptcy
- Low income
- Living beyond one’s means
- Extensive gambling
- Addiction to drugs/alcohol
- Frustration with job
- Resentment of supervisors
An employee’s personal integrity is very important because many employees may have the motivation and opportunity to steal, but do not do so because of moral character.
- sympathize with thieves
- are more vulnerable to peer pressure to steal
- often think about and talk about different ways to steal
- are able to rationalize theft
An employee’s ability to rationalize theft can be caused by envy of the employer’s success. It may also be caused by the employee witnessing the employer cutting corners. Employees who witness their employers cutting corners may rationalize their behavior by thinking, “if it’s OK for him, then it’s OK for me.”
Once an employee is hired, an employer has little control over the employee’s motivation to steal or the employee’s personal integrity. The employer does have control over the employee’s opportunity to steal by implementing strong internal controls.
An extensive discussion of internal controls covering all aspects of a restaurant’s operations can’t be done in a page and a half blog post, but I’ll include some examples of how an employee can steal cash and the internal controls that can implemented to help prevent these thefts. It is important to note that internal controls will never absolutely 100% prevent theft or fraud, but internal controls can substantially reduce the likelihood of such events.
8 Quick Ways to Steal Cash
1. Short-ring: charge the customer the actual price, underring the sale on the cash register, and pocket the difference
2. Voided Sale / Phony Walkout: cashier voids out the entire check (or certain items) and pockets the money for the voided items / cashier collects the money from the customer, but claims the customer walked out without paying
3. Fictitious Payouts: cashier claims money in the register was used to pay for food deliveries, to buy supplies at a nearby store, or to pay for other miscellaneous expenses
4. Charge customer full price, but ring sale up at a discounted child or senior citizen price
5. Cashier steals coupons, collects the full sale price from the customer, includes a stolen coupon with the customer payments, and steals cash equal to the coupon discount
6. Double Drop: waiter reuses an old guest check for a customer and does not ring up the current sale
7. Alter the breakout of tip and check amounts on credit card receipts to overstate the amount of tips and understate the check amounts
8. Cashier records sales on training key which does not feed into the daily counts
Internal Controls That Will Help
- Each cashier has his drawer counted at the end of each shift
- Manager conducts surprise counts of employees’ registers at random
- Manager conducts a daily cash reconciliation to reconcile cash received, sales, cash payouts, credit card sales, and other cash items
- Cash payouts require a vendor invoice or store receipt
- Bank reconciliations are done monthly
- Spotters (people sent in by management to act as customers and report back to management) are used in the restaurant to observe employee behavior
- Video cameras observe the registers
- Comparing the Cost of Food margins on the Profit & Loss statements with industry averages
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.