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
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.

Inventory 
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 
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.

Accounts Payable 
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.

Financial Controls
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.

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