PREVENTING FRAUD IN THE HOSPITALITY INDUSTRY

Transcription

1 PREVENTING FRAUD IN THE HOSPITALITY INDUSTRY Provided by David M. Bleser of Hospitality Safeguards, Inc. Jim Stover of Arthur J. Gallagher TABLE OF CONTENTS I. INTRODUCTION TO FRAUD...2 A. FRAUD FOUNDATION...2 B. COST OF FRAUD FOR THE HOTEL INDUSTRY...2 C. MISCONCEPTIONS OF FRAUD...2 II. COMMON TYPES OF FRAUD A. CREDIT CARD CREDITS...2 B. SWIPING CHECKS FOR CASH...3 C. CHANGE ORDERS...3 D. DEPOSITS NOT GOING TO THE BANK...3 III. COMMON TYPES OF FRAUD IV. FRAUD PREVENTION...4 V. CONCLUSION...5 1

2 I. INTRODUCTION TO FRAUD A. FRAUD FOUNDATION Companies can t prevent fraud effectively if they don t understand the basic concepts or theories of fraud. According to the Association of Certified Fraud Examiners, Occupational Fraud can be defined as, the use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets. According to the Report to the Nation 2004 by the Association of Certified Fraud Examiners, 6% of a company s revenue will be lost to fraud each year. All frauds can be broken down into 3 major categories: Asset Misappropriation Corruption Fraudulent Statements The majority of frauds contain 3 basic elements, opportunity, pressure and rationalization. This is known as the Fraud Triangle. Opportunity exists because of the weakness in internal controls. Pressure can come from family problems at home, substance abuse or job related. Rationalization is the justification one creates for committing the fraud. B. COST OF FRAUD FOR THE HOTEL INDUSTRY Based on the cases we have investigated the average loss due to fraud from 2000 through 2003 was $35,000 per case. Since January 1, 2004 the average amount has increased to $65,000 - $75,000 per case. The Iceberg Theory is very true when dealing with fraud. In most cases, the initial amount of loss, when the fraud is first discovered, is about 10% of the total amount that is subsequently found and prosecuted. These amounts do not include the cases of fraud we discovered while conducting mystery shopping at our client s food and beverage operations. C. MISCONCEPTIONS OF FRAUD There are several misconceptions of fraud within the hotel industry. Among them are the following: Fraud is 100% preventable. Fraud doesn t cost businesses much money. Implementing internal controls is expensive and not worth the investment. The Sarbanes-Oxley Act will drastically reduce the amount of fraud that occurs. II. COMMON TYPES OF FRAUD 2003 A. CREDIT CARD CREDITS This is the issuing of credits to one s own credit or debt card under the disguise of a guest s name. Unfortunately numerous property management systems allow a credit to be issued to card that has never been charged. 2

3 B. SWIPING CHECKS FOR CASH This occurs when a check that has not been posted in the property management system, is substituted for cash that has been posted in the property management system. C. CHANGE ORDERS Fraud through change orders happen when the hotel is not required to document when change orders occur or are not required by internal policy to give the money to the bank prior to receiving the change. D. DEPOSITS NOT GOING TO THE BANK This type of fraud occurs when the hotels daily deposits do not go to the bank on a daily basis. It is expected that deposits go to the bank every day, Monday through Friday. The weekends or holiday deposits should go to the bank the next scheduled business day. III. COMMON TYPES OF FRAUD 2004 A. VENDOR KICKBACKS Kickbacks are undisclosed payments made to hotel employees. Our investigations indicate that most of these occur in the Food and Beverage Department. However, we have seen instances in which kickbacks have been given to Sales Managers or Executive Housekeepers. B. EXPENSE SIDE FRAUDS These types of frauds involve one of the following: Billing Schemes Payroll Expense Reports Check Tampering Register Disbursement Billing schemes involve the individual creating a shell company, buying from a non-approved vendor, selling of excess hotel property that is advertised as personal, or buying personal items with company funds. Payroll frauds involve creating ghost employee, altering time records, paying for incorrect job classifications, or workers compensation. Our experience indicates that these frauds go largely undetected because increased expenses in this area are often perceived as ineffective management. Expense report fraud occurs when individuals submit fictitious expenses, overstated expenses or the repeated submission of the same expense. 3

4 Check tampering frauds usually occur when someone alters a check payee, or a check is created by an authorized person. Register disbursement frauds occur when an individual replaces a check that a guest had paid for their breakfast with cash, with a coupon that entitles the guest to a free breakfast. In some cases a check that was paid with cash is simply voided. C. IDENTITY THEFT There have been cases in which individuals have obtained credit card information of a guest from calling either the hotel or the Central Reservation. After numerous calls the individuals are able to obtain enough information on a guest that they can make non-contact purchases. These are purchases that are made either on-line or over the phone. While these types of thefts do not directly affect the hotel s current financial statement than can impact future financial statements if not handled correctly by the corporate staff. IV. FRAUD PREVENTION An effective Fraud Prevention Program begins at the top of the corporate structure whether it is the Board of Directors lead by the members of the audit committee for public companies or the Chief Executive Officer/ Owner for private companies. The first step is for organizations to adopt an Anti-fraud Culture similar in manner as many have done in regards to sexual harassment. This is done in part by creating a Fraud (Ethics) Statement. This statement should not only be posted on the Employee Bulletin Board but be sent to all vendors as well. Let the vendors know that your company does not tolerate any form of fraud. According to The Report to the Nation 2004 the number 1 initial detection method of a fraud is from an employee, followed by tip from a customer, tip from a vendor and finally an anonymous tip. The second step is to create a Fraud Policy. Establish specific procedures for dealing with possible cases of fraud. Ensure that the policy is specific in not only identifying who is contacted but when also. The failure to react quickly to potential cases of fraud can result in increase loss and reduces the likely-hood of a successful prosecution and recovery. Of course, over reacting can also have a negative impact on the resolution of the fraud. By not conducting a thorough investigation, organizations may miss other weaknesses in their internal controls or fail in uncovering the total amount of misappropriated funds. Review the internal controls not only at the corporate level but at the hotel level as well on a yearly basis. The most effective manner in which to get this accomplished is by conducting a Fraud Survey. The survey should identify not only weaknesses, i.e. missing controls, but controls that need to be tightened as well. An effective Internal Audit Program can save companies thousands of dollars. Based on the Report to the Nation 2004 an effective audit program was the number 2 detection method. The average loss due to fraud was $80,000 compared to $130,000 for those companies that did not have an audit program. Companies must be willing to share information, good or bad, with their auditors. A lot of the information that makes a successful audit program can be obtained through the yearly Fraud Survey. Credit checks should be the primary background check that is done on all managers, accounting staff and night auditors, at the bare minimum. Credit checks tell a persons life story for the last 7 years regardless 4

5 how many times they have moved. Criminal checks are very limited. It is suggested by that you check a person s criminal history going back at least 5 years. Currently only 13 states allow statewide checks so for those states that don t allow it, it can be very expensive to do it county by county. What happens if a person lies about where they have lived or forgets to put down an address because of a conviction? The hotel would never know. However, if the person have been convicted and is ordered to pay restitution or has a lien against them because of it, it will appear on their credit report. Another factor to consider is cost. Credit checks are less than $20 compared to $40 - $50 for an accurate criminal check. Another in-expensive method to prevent credit card fraud is to obtain a Credits Issued Report from your credit card processor. This report costs about $10 and shows any credits that have been issued without the proper debits and any card that has multiple credits. But most importantly, the most effective tool to prevent fraud is to educate people. People need to be educated so that they can recognize the red flags, understand why there is a need for internal controls and what to do when they uncover a suspected fraud. Yes, we must teach them how to steal that way they learn how to recognize it. Remember, the number 1 detection method is from a fraud hotline. The Sarbanes-Oxley Act will hold individuals more accountable in the reporting of financial numbers. However it will not drastically reduce the amount of fraud. This is because it does not mandate fraud prevention or even ethics training. How can people report suspected fraud if they don t know what to look for? V. CONCLUSION As this presentation has shown, fraud does cost hotels thousands of dollars each year. However by taking a pro-active approach to fraud, this cost can be drastically reduced and in some cases completely eliminated. 5