Implementing Internal Accounting Controls in Restaurants | Honest Buck Accounting

Have you ever thought about Internal Accounting Controls? Your accountant may only be paying attention to the numbers. This can be very costly. Smart thieves can drain your accounts. They can take profits away from the business even though a CPA may be auditing the books. They will do things you never thought of.

Every company's goal is to turn profits. To do that, you must get your cash management under control.

What are Internal Accounting Controls?

Internal Accounting Controls (IAC) are methods that help you control risks. They provide quality assurances and explore any weaknesses in your operation.

One of the chief methods thieves use make off with your profits is through the cash register. Small restaurants encounter these problems more often than larger establishments. This is because they have fewer controls in place.

Another way is through outright theft of inventory, equipment, or other goods. A third is through improper employee use of time.

It is very important that you give attention to Internal Accounting Controls in a restaurant business. Let's look at some of the ways these thieves exploit the weaknesses in your controls.

The Cash Register / Point-of-Sale

The most common method is at the cash register, where sales occur. The simplest violation is reaching into the register and taking the cash. If a small restaurant has no system at all, this may be the case.

Or, it can have a bit more sophisticated. Take, for example, one owner-operated restaurant whose owner, Bill, thought everything was under control. After all, his totals balanced out each day. Then his accountant said that cost-of-goods was too high. The owner went digging.

First, Bill looked at previous years' statements. The trend had started two years ago. They had caught employees stealing from the register. But that wouldn't account for the three-point spread in numbers in as little time as two years.

Bill thought the problem could be employees taking out inventory, so he began to investigate. He told his manager, Dave, to keep a close watch as employees clocked out.

No, the employees weren't carting away boxes of food. Neither he nor Dave noticed anyone walking out with a large bundle of food. But someone was making away with the profits.

The Score Card - The Exception Report

Bill began going over the spreadsheet that Dave filled out each evening. It was a quick Excel form that tallied the sales, including credit card sales. Everything balanced, and Bill was at a loss for figuring out what was going on.

Over the next few months, Bill went over everything he could think of. He finally told his accountant that she had to be wrong. He passed it off to a "bad business climate." He talked it over with other business owners, who were also having problems. It had been a couple of rough years for all.

But things didn't get any better. On the surface things were fine. The manager, Dave, was bringing in lots of new customers. He was easy-going and had a smile for everyone.

At the end of the quarter, the accountant reviewed Bill's income statement. She saw the same problem and called Bill.

She suggested that he should do a score card for each employee who handled the register. Bill didn't like the idea of going through all those old records. He called Dave in and told him to get busy. Dave took a few days to review and came back. Nothing was amiss.

Bill asked him where the score card was. Bill produced it. It listed six employees who had run the two registers. Nothing seemed amiss. He took it to the accountant and showed it to her. Bill said if things didn't get better, he would sell the business. He'd had to take a loan to pay his payroll taxes.

She looked over the report and frowned. "Who did this report?" she asked. "You never type things." Bill admitted that Dave had done it. The report was for one week. She told him to go back and get the register tapes for the whole month without informing Dave of what he was doing. They'd go over them.

They looked at the tapes and put together another exception report score card. It didn't take long for Bill to figure out what was going on. For the week Dave had chosen to report, Dave himself had not handled the register. There were a moderate number of voids, especially from one new employee.

The other three weeks revealed something quite different. Dave had managed and operated the register during those weeks, and there were a high number of voids traceable to him. At first Bill thought these were accidental, although he knew Dave was a good hand at the register. But further investigation proved otherwise.

Dave had been pocketing the money from the voids. The more he succeeded, the more aggressive he became. When promoted to manager, he told friends that he now "owned part of the place." And he did - or at least the cash register.

He now had a key and threw a party after hours at the restaurant, none of it going through the cash register. He appeared to be a perfect employee. He arrived on time, managed the employees, and filled out the cash reports. He kept the place clean and the customers satisfied.

Bill violated several basic principles of Internal Control in his relationship with Dave. He allowed a shift manager to handle the register alone and perform accounting functions. He also handled the reporting alone, which left him with ample opportunity to steal.

He had put all his faith and trust in this employee. It was a cruel letdown.

Thieves steal money from receipts in countless ways. Although systems can be more sophisticated than the above example, none are foolproof. To prevent such theft you need a lot of detailed information.

Let's look at some ways to mitigate risk.

Voids, Comps and Gift Cards

Voids are transactions which cancel or delete previous transactions. The deleted transaction is already completed and visible in the system. A variation is opening the transaction while the customer pays and then dropping the sale once the customer has paid.

Comps occur when customers change their mind after receiving the order. The employee voids all or part of the order but does not record the corresponding comp. A server or cashier may void out one of the items and pocket the extra change. These transactions are also called discounts.

Gift card thefts are harder to track because of the lack of controls. Customers can alter amounts. A manager should number and register the amounts. A manager's signature should be on each card. Otherwise, employees may give them to friends or family.

The cashier may drop an order and load in a gift card for the same amount. In this case, you should look for gift cards with uneven amounts. Purchasers generally purchase cards for an even amount.

Counting

Managers should use frequent register swaps and skims (counts). Thus, large amounts do not accumulate in the tills. This creates accountability for all employees. Employees should not share registers.

We often think that registers that are "under or short" are the only problems to worry about. But registers that are "over" may point to an employee who lost count of how much cash he took.

Many thieves figure out methods for not being caught. Here is a typical scenario of a "counting" theft:

An employee decides to use Combo #3 to fund his theft. Every time someone orders that combo, he rings it up and subtotals it so the customer views it. After the customer pays, he clears the sale. He puts the cash in the drawer and makes change when needed. Only, he doesn't complete the sale. He puts a penny in the dime drawer, or vice versa. Or, he moves one little piece of paper from one side of the register to the other.

Near the end of his shift, he counts the mismatched coins or bits of paper, multiplies it by the combo's cost. He takes that much out of the till. The cash in the register will now match the tape, even if there is a POS (Point-of-Sale) system.

A POS system fails to prevent many types of theft. Thieves depend on hiding single transactions among many legitimate ones. An integrated system provides a direct way to link to the accounting system. No longer do sales and payment data and information have to be processed by hand.

For instance, with a POS system, a thief might void and refund the amounts onto a personal credit card. With an integrated payment system, this data transmits into the accounting system. It is much easier to trace the perpetrator.

Credit Card Fraud

Credit card fraud is a newer concern within the last century. This occurs in many ways. Here are some examples:

A janitor who works after closing hours operates the credit card machine. He prints a consolidation report to review sales. Then he refunds purchases to his own credit card. He runs an end of shift report to reset the machine for the next cashier. This theft is not noticed for a month or two.

No records or receipts show the refunds. Thieves may continue doing this for a long time if they work with smaller amounts.

Skimmers have small devices the size of your palm that attach to a reader. Hackers steal customer information by breaching restaurant databases. These types of activities are on the rise.

Even chip technology isn't foolproof because the card information is still magnetized. Credit card fraud can create a bad reputation for the restaurant.

Internal Accounting Control Methods

Here is a list of methods for Internal Accounting Control:

  1. Use software to create exception reports for voids and comps.

  2. Look at "overs" as well as "shorts" on daily reports.

  3. Ensure proper segregation of duties between handling cash and accounting.

  4. Check for cashiers doing "counting" to cover voids.

  5. Watch cashiers who volunteer for auditing at certain times, when they have a clean till.

  6. Track cashiers who want items voided or who "find" cash to cover a short.

  7. Keep a ledger account for gift cards.

  8. Watch for gift card purchases or reloads that are not in rounded or even figures.

  9. Avoid having employees share registers. If they do, have them both present during auditing and have them both sign for it.

  10. Check tills often. Use software to send an alert when there is too much cash on hand. Do the audit with the cashier present and have them sign the register reading report.

  11. Don't leave money in the till if it isn't needed.

  12. Shift managers should not handle tills alone or unsupervised.

  13. Use integrated software solutions if possible.

  14. Train employees to understand the Internal Control rules and the reasons for them.

Inventory Theft

Stealing food, beverages and supplies by employees or vendors is a serious problem. Employees steal food for several reasons. They may feel that they are "owed" these benefits for all the work they do.

Or they may like the food and don't consider taking from the inventory as theft.

Managers should explain to employees that this behavior is inventory theft.

One way to prevent this type of theft is to not allow large purses, sacks or backpacks in the area. Provide another storage spot for such items. The employees will not be so tempted to remove items. Also, make sure unlocked trash cans are not placed near employee exits.

Inventory losses can occur when employees make special deals with vendors. The vendors in turn may give kickbacks to the employees. This type of theft is usually by or with the collusion of managers. Sometimes inventory is sold and accounted for as spoilage.

Another form of theft is allowing inventory to spoil or go to waste. Improper storage or buying too much are reasons for spoilage and waste.

Employees often don't feel they are doing anything wrong in giving food to friends. A cashier may oblige friends by discounting an item, dropping an order or voiding it. It may appear as a regular order, with the employee taking money and pretending to make change.

If the restaurant also has a bar, you should also monitor the pouring of drinks for content and volume.

Employees steal not only food but supplies and even equipment. Passing along the cost of these items may result in the loss of customers.

Use proactive methods to control theft of inventory:

  1. Compare buying orders against deliveries at the time of delivery.

  2. Watch the area with security cameras.

  3. Make regular stock checks performed at unpredictable times or right before deliveries.

  4. Review comps, voids, and returns.

  5. Review policies with employees in training sessions.

Theft of Time and Wages

Employees who arrive too early and clock in get more wages than they earn. This adds to payroll costs.

Some employers allow employees to arrive 15 minutes early so they can get ready for their shifts. Employees arrive early for various reasons. Some of these reasons are legitimate. They may have started early to avoid heavy traffic or to adjust for bad weather. For others, it may be that the bus or their ride drops them off earlier. Sometimes the excuse is they have work to make up.

Employees often check out late to draw more time or overtime. On occasion they may forget to clock out. At other times, it may be intentional. They may spend time socializing before they clock out or try to catch up with their work.

Slacking off also increases costs. You pay the employee for doing nothing. This can add up to thousands of dollars over a short time.

Others abuse the time system by "buddy punching." An employee punches in for another employee. This may be to keep him from being late, or it may be to cover up the fact that they have left early. Either way, this is a serious offense, which should result in suspension or dismissal.

Software systems can alert supervisors if an employee is about to incur overtime. Some software systems alert the manager if there is a labor overage for a low volume of sales.

Let's look at some ways to discourage these practices:

  1. You should require manager approval for any schedule change.

  2. Supervisors should watch shift changes to ensure employees don't clock out for others.

  3. Managers should review time clock records against employee schedules.

  4. Management can install a fingerprint reader to prevent buddy punching.

  5. Use a software program with automatic alerts to warn supervisors of certain conditions.

Accounting and Intellectual Property Theft

Accounting theft occurs when a thief has access to cash. Cash is always the big temptation, no matter the level on which it occurs. Anyone in management or ownership may be able to override system controls.

Day-to-day thefts often lead to thousands of dollars of damage. Theft by upper management or owners who have access to accounts can add up to millions of dollars. These thefts can even cause restaurant closures. Often these stories make the news.

Theft of company proprietary rights in processes, recipes, or branding can occur. These parts of the business add the most value and profit to the business. Their secrets are somewhat protected by nondisclosure or confidentiality agreements.

Conclusion

Restaurants are particularly vulnerable to employee theft. This is because they handle large amounts of cash.

Employees are already on site and are familiar with the operation. They owners often place too much trust in those responsible for the cash and inventory.

Restaurant owners may not pay enough attention to risk management. They don't stop to consider Internal Accounting Control issues.

Having an accountant on board who is well-versed in this area can lead to lower costs. It can result in greater security for the business.

The Honest Buck Accounting Team will help you set up an Internal Control system that is right for you. We will meet your needs in this and other tax and accounting areas. You can get find out more about us here or call us at (206) 533-7097.

Have you ever thought about Internal Accounting Controls? Your accountant may only be paying attention to the numbers. This can be very costly. Smart thieves can drain your accounts. They can take profits away from the business even though a CPA may be auditing the books. They will do things you never thought of.

Every company's goal is to turn profits. To do that, you must get your cash management under control.

What are Internal Accounting Controls?

Internal Accounting Controls (IAC) are methods that help you control risks. They provide quality assurances and explore any weaknesses in your operation.

One of the chief methods thieves use make off with your profits is through the cash register. Small restaurants encounter these problems more often than larger establishments. This is because they have fewer controls in place.

Another way is through outright theft of inventory, equipment, or other goods. A third is through improper employee use of time.

It is very important that you give attention to Internal Accounting Controls in a restaurant business. Let's look at some of the ways these thieves exploit the weaknesses in your controls.

The Cash Register / Point-of-Sale

The most common method is at the cash register, where sales occur. The simplest violation is reaching into the register and taking the cash. If a small restaurant has no system at all, this may be the case.

Or, it can have a bit more sophisticated. Take, for example, one owner-operated restaurant whose owner, Bill, thought everything was under control. After all, his totals balanced out each day. Then his accountant said that cost-of-goods was too high. The owner went digging.

First, Bill looked at previous years' statements. The trend had started two years ago. They had caught employees stealing from the register. But that wouldn't account for the three-point spread in numbers in as little time as two years.

Bill thought the problem could be employees taking out inventory, so he began to investigate. He told his manager, Dave, to keep a close watch as employees clocked out.

No, the employees weren't carting away boxes of food. Neither he nor Dave noticed anyone walking out with a large bundle of food. But someone was making away with the profits.

The Score Card - The Exception Report

Bill began going over the spreadsheet that Dave filled out each evening. It was a quick Excel form that tallied the sales, including credit card sales. Everything balanced, and Bill was at a loss for figuring out what was going on.

Over the next few months, Bill went over everything he could think of. He finally told his accountant that she had to be wrong. He passed it off to a "bad business climate." He talked it over with other business owners, who were also having problems. It had been a couple of rough years for all.

But things didn't get any better. On the surface things were fine. The manager, Dave, was bringing in lots of new customers. He was easy-going and had a smile for everyone.

At the end of the quarter, the accountant reviewed Bill's income statement. She saw the same problem and called Bill.

She suggested that he should do a score card for each employee who handled the register. Bill didn't like the idea of going through all those old records. He called Dave in and told him to get busy. Dave took a few days to review and came back. Nothing was amiss.

Bill asked him where the score card was. Bill produced it. It listed six employees who had run the two registers. Nothing seemed amiss. He took it to the accountant and showed it to her. Bill said if things didn't get better, he would sell the business. He'd had to take a loan to pay his payroll taxes.

She looked over the report and frowned. "Who did this report?" she asked. "You never type things." Bill admitted that Dave had done it. The report was for one week. She told him to go back and get the register tapes for the whole month without informing Dave of what he was doing. They'd go over them.

They looked at the tapes and put together another exception report score card. It didn't take long for Bill to figure out what was going on. For the week Dave had chosen to report, Dave himself had not handled the register. There were a moderate number of voids, especially from one new employee.

The other three weeks revealed something quite different. Dave had managed and operated the register during those weeks, and there were a high number of voids traceable to him. At first Bill thought these were accidental, although he knew Dave was a good hand at the register. But further investigation proved otherwise.

Dave had been pocketing the money from the voids. The more he succeeded, the more aggressive he became. When promoted to manager, he told friends that he now "owned part of the place." And he did - or at least the cash register.

He now had a key and threw a party after hours at the restaurant, none of it going through the cash register. He appeared to be a perfect employee. He arrived on time, managed the employees, and filled out the cash reports. He kept the place clean and the customers satisfied.

Bill violated several basic principles of Internal Control in his relationship with Dave. He allowed a shift manager to handle the register alone and perform accounting functions. He also handled the reporting alone, which left him with ample opportunity to steal.

He had put all his faith and trust in this employee. It was a cruel letdown.

Thieves steal money from receipts in countless ways. Although systems can be more sophisticated than the above example, none are foolproof. To prevent such theft you need a lot of detailed information.

Let's look at some ways to mitigate risk.

Voids, Comps and Gift Cards

Voids are transactions which cancel or delete previous transactions. The deleted transaction is already completed and visible in the system. A variation is opening the transaction while the customer pays and then dropping the sale once the customer has paid.

Comps occur when customers change their mind after receiving the order. The employee voids all or part of the order but does not record the corresponding comp. A server or cashier may void out one of the items and pocket the extra change. These transactions are also called discounts.

Gift card thefts are harder to track because of the lack of controls. Customers can alter amounts. A manager should number and register the amounts. A manager's signature should be on each card. Otherwise, employees may give them to friends or family.

The cashier may drop an order and load in a gift card for the same amount. In this case, you should look for gift cards with uneven amounts. Purchasers generally purchase cards for an even amount.

Counting

Managers should use frequent register swaps and skims (counts). Thus, large amounts do not accumulate in the tills. This creates accountability for all employees. Employees should not share registers.

We often think that registers that are "under or short" are the only problems to worry about. But registers that are "over" may point to an employee who lost count of how much cash he took.

Many thieves figure out methods for not being caught. Here is a typical scenario of a "counting" theft:

An employee decides to use Combo #3 to fund his theft. Every time someone orders that combo, he rings it up and subtotals it so the customer views it. After the customer pays, he clears the sale. He puts the cash in the drawer and makes change when needed. Only, he doesn't complete the sale. He puts a penny in the dime drawer, or vice versa. Or, he moves one little piece of paper from one side of the register to the other.

Near the end of his shift, he counts the mismatched coins or bits of paper, multiplies it by the combo's cost. He takes that much out of the till. The cash in the register will now match the tape, even if there is a POS (Point-of-Sale) system.

A POS system fails to prevent many types of theft. Thieves depend on hiding single transactions among many legitimate ones. An integrated system provides a direct way to link to the accounting system. No longer do sales and payment data and information have to be processed by hand.

For instance, with a POS system, a thief might void and refund the amounts onto a personal credit card. With an integrated payment system, this data transmits into the accounting system. It is much easier to trace the perpetrator.

Credit Card Fraud

Credit card fraud is a newer concern within the last century. This occurs in many ways. Here are some examples:

A janitor who works after closing hours operates the credit card machine. He prints a consolidation report to review sales. Then he refunds purchases to his own credit card. He runs an end of shift report to reset the machine for the next cashier. This theft is not noticed for a month or two.

No records or receipts show the refunds. Thieves may continue doing this for a long time if they work with smaller amounts.

Skimmers have small devices the size of your palm that attach to a reader. Hackers steal customer information by breaching restaurant databases. These types of activities are on the rise.

Even chip technology isn't foolproof because the card information is still magnetized. Credit card fraud can create a bad reputation for the restaurant.

Internal Accounting Control Methods

Here is a list of methods for Internal Accounting Control:

  1. Use software to create exception reports for voids and comps.

  2. Look at "overs" as well as "shorts" on daily reports.

  3. Ensure proper segregation of duties between handling cash and accounting.

  4. Check for cashiers doing "counting" to cover voids.

  5. Watch cashiers who volunteer for auditing at certain times, when they have a clean till.

  6. Track cashiers who want items voided or who "find" cash to cover a short.

  7. Keep a ledger account for gift cards.

  8. Watch for gift card purchases or reloads that are not in rounded or even figures.

  9. Avoid having employees share registers. If they do, have them both present during auditing and have them both sign for it.

  10. Check tills often. Use software to send an alert when there is too much cash on hand. Do the audit with the cashier present and have them sign the register reading report.

  11. Don't leave money in the till if it isn't needed.

  12. Shift managers should not handle tills alone or unsupervised.

  13. Use integrated software solutions if possible.

  14. Train employees to understand the Internal Control rules and the reasons for them.

Inventory Theft

Stealing food, beverages and supplies by employees or vendors is a serious problem. Employees steal food for several reasons. They may feel that they are "owed" these benefits for all the work they do.

Or they may like the food and don't consider taking from the inventory as theft.

Managers should explain to employees that this behavior is inventory theft.

One way to prevent this type of theft is to not allow large purses, sacks or backpacks in the area. Provide another storage spot for such items. The employees will not be so tempted to remove items. Also, make sure unlocked trash cans are not placed near employee exits.

Inventory losses can occur when employees make special deals with vendors. The vendors in turn may give kickbacks to the employees. This type of theft is usually by or with the collusion of managers. Sometimes inventory is sold and accounted for as spoilage.

Another form of theft is allowing inventory to spoil or go to waste. Improper storage or buying too much are reasons for spoilage and waste.

Employees often don't feel they are doing anything wrong in giving food to friends. A cashier may oblige friends by discounting an item, dropping an order or voiding it. It may appear as a regular order, with the employee taking money and pretending to make change.

If the restaurant also has a bar, you should also monitor the pouring of drinks for content and volume.

Employees steal not only food but supplies and even equipment. Passing along the cost of these items may result in the loss of customers.

Use proactive methods to control theft of inventory:

  1. Compare buying orders against deliveries at the time of delivery.

  2. Watch the area with security cameras.

  3. Make regular stock checks performed at unpredictable times or right before deliveries.

  4. Review comps, voids, and returns.

  5. Review policies with employees in training sessions.

Theft of Time and Wages

Employees who arrive too early and clock in get more wages than they earn. This adds to payroll costs.

Some employers allow employees to arrive 15 minutes early so they can get ready for their shifts. Employees arrive early for various reasons. Some of these reasons are legitimate. They may have started early to avoid heavy traffic or to adjust for bad weather. For others, it may be that the bus or their ride drops them off earlier. Sometimes the excuse is they have work to make up.

Employees often check out late to draw more time or overtime. On occasion they may forget to clock out. At other times, it may be intentional. They may spend time socializing before they clock out or try to catch up with their work.

Slacking off also increases costs. You pay the employee for doing nothing. This can add up to thousands of dollars over a short time.

Others abuse the time system by "buddy punching." An employee punches in for another employee. This may be to keep him from being late, or it may be to cover up the fact that they have left early. Either way, this is a serious offense, which should result in suspension or dismissal.

Software systems can alert supervisors if an employee is about to incur overtime. Some software systems alert the manager if there is a labor overage for a low volume of sales.

Let's look at some ways to discourage these practices:

  1. You should require manager approval for any schedule change.

  2. Supervisors should watch shift changes to ensure employees don't clock out for others.

  3. Managers should review time clock records against employee schedules.

  4. Management can install a fingerprint reader to prevent buddy punching.

  5. Use a software program with automatic alerts to warn supervisors of certain conditions.

Accounting and Intellectual Property Theft

Accounting theft occurs when a thief has access to cash. Cash is always the big temptation, no matter the level on which it occurs. Anyone in management or ownership may be able to override system controls.

Day-to-day thefts often lead to thousands of dollars of damage. Theft by upper management or owners who have access to accounts can add up to millions of dollars. These thefts can even cause restaurant closures. Often these stories make the news.

Theft of company proprietary rights in processes, recipes, or branding can occur. These parts of the business add the most value and profit to the business. Their secrets are somewhat protected by nondisclosure or confidentiality agreements.

Conclusion

Restaurants are particularly vulnerable to employee theft. This is because they handle large amounts of cash.

Employees are already on site and are familiar with the operation. They owners often place too much trust in those responsible for the cash and inventory.

Restaurant owners may not pay enough attention to risk management. They don't stop to consider Internal Accounting Control issues.

Having an accountant on board who is well-versed in this area can lead to lower costs. It can result in greater security for the business.

The Honest Buck Accounting Team will help you set up an Internal Control system that is right for you. We will meet your needs in this and other tax and accounting areas. You can get find out more about us here or call us at (206) 533-7097.

Rachelle CalinaComment