Protecting Your Brewpub Business from Fraud
Brewpubs, like other business operations, need strong internal controls to monitor and maintain the quality of goods and services, maximize profits, and increase the likelihood that fraud or theft will be discovered, addressed, and mitigated. Strong internal controls are particularly critical for brewpubs not only because of their size, scale, and the uniqueness of their operations, but also because there are numerous cash sales transactions, a high number of transactions in a day, several different employees handling cash, and a rapid turnover rate for key employees. These characteristics also make setting up and enforcing internal controls challenging.
A major focus of internal control systems at businesses such as brewpubs is the prevention of fraud and embezzlement. Three conditions are necessary for fraud and embezzlement to take place:
- Need, such as the economic or psychological deficiencies that drive people to steal;
- Opportunity, including lapses in fraud prevention that facilitate their actions; and
- Failure of conscience, which allows a thief to rationalize his or her act of stealing.
Every brewpub can and should implement internal controls to help prevent and identify high-risk behaviors.
Cash theft is one of the most frequently occurring methods of stealing from businesses like brewpubs, and also one of the most difficult to detect. It can occur prior to recording a transaction or after, but before the cash is deposited in the bank. To help identify and prevent cash theft, brewpubs should know and limit check signers, reconcile bank accounts monthly and review those reconciliations, and segregate accounting functions among multiple employees—for example, asking separate employees to manage physical control of the cash and developing support documentation for disbursements. Brewpubs should also tie out their daily deposit reports and compare them to bank deposit records and point-of-sale reports.
Theft of food and beverage inventory is a tremendous problem for brewpubs. Food and beverages are highly transportable, used by almost everyone, and once stolen, are almost impossible to identify as belonging to the brewpub. In addition, no standard definition of theft applies in restaurants and bars for eating restaurant food onsite or identifying what you can or cannot do with leftovers. Controls over inventory include assigning employees independent of storage duties to take a physical inventory and compare actual stock to the book inventory. This is best accomplished when pre-printed inventory forms are used, items are orderly, and two individuals conduct the physical inventory. Any significant differences of overages or shortages should be investigated and approved. Brewpubs also have their production facility onsite, which contains a proprietary process and product, so they should also restrict inventory access to certain employees and secure stock in locked facilities.
Payroll is the largest expense for most hospitality operations, and internal controls in this area are critical. Brewpubs should segregate different responsibilities among employees, such as authorizing employment and wage rates, maintaining the payroll system, generating checks, and reconciling payroll bank accounts. Also, someone with independent authority should routinely examine the payroll records, noting employees’ names, authorized gross pay, hours worked, deductions, and net pay.
The accounts payable function entails setting up new vendors, entering invoices, and producing checks. Any breakdown of internal controls in this area could allow employees to create fictitious vendors and misappropriate cash. Brewpubs should establish control over the vendors’ invoices when received; compare vendor invoices to receiving reports and purchase orders; cancel all vouchers, invoices, and supporting documents when paid; restrict new vendor setup; and segregate duties among different payroll personnel. Brewpubs have unique challenges related to beer production, such as ordering schedules and contracts with long-term commitments; these can make accounts payable duties more difficult to set up and monitor.
Brewpub financial controls include financial statement review and technology such as point-of-sale (POS) registers, financial accounting software, and software to integrate both. A POS system limits access to certain employees and certain functions, and creates a rigorous cash and credit card tracking system, making it more difficult for employees to steal money from registers or void a transaction. It is also important for brewpub owners to monitor and analyze both the income statement and the balance sheet to avoid unexpected adjustments. Brewpub owners should input sales, invoices, and payroll on a routine basis and analyze, review, and reconcile all accounts on the balance sheet. In addition, brewpubs should break down the revenue and cost sources of their unique business lines between restaurant, production, and retail. Once this has been accomplished, the financial statements should be used as a tool to monitor both weekly and monthly results on a timely basis to identify issues as soon as possible.
Brewpubs have many characteristics that make them relatively vulnerable to theft, but implementing robust internal controls can help mitigate the risk. Savvy brewpub owners will examine every function of their operation and establish internal controls to address each facet, from managing physical inventory to segregating accounting functions across multiple employees, preventing any one employee from carrying out a theft from start to finish. Brewpubs that invest the time and oversight into these systems are better poised to catch and weed out instances of fraud and embezzlement, while building critical infrastructure for solid financials.
A version of this article previously ran in The New Brewer and is being reprinted with permission from the Brewers Association.