Red Bluff Inn & Café Audit Case Study

Case 5.3 Red Bluff Inn & Café

Background

1. Matt Franklin is the owner of 18-room motel and café.
2. The motel is located in a remote area of southern Utah, the area is very popular for tourist. Otherwise, Matt live far from there and only control periodically.
3. Matt hired a young couple to run the motel and café with day-to-day control fully
4. Matt pay them a monthly salary.
5. The young couple live for free in a small apartment behind motel office.
6. The young couple have many important responsible through operating the motel and café such as in hiring employee, sales and receivable activities with the bank.
7. Matt need our (as an auditor) advise through this situation to devise creative internal control to help prevent or detect fraud in his business.

Answer:

For hospitality security personnel, auditors and controllers, the biggest anti-fraud challenge is the seemingly limitless variety of ways that employees and outsiders find to steal from the organization.

Fortunately, historical experience provides today's hotel and restaurant management with a relatively clear picture of at least the most common types of scams and schemes to which their properties are vulnerable. And, of course, knowledge is the first step toward prevention. Here is a partial list of the main forms of hotel and restaurant scams and schemes to beware of...

• Skimming. In hotel restaurants and bars, large amounts of cash are in play, even with the widespread use of room charges, comps and credit card payments. Whenever cash is exchanged between customers and employees, skimming is inevitable. 

This includes stealing customer checks that are made out to "cash"... cashing "hot" checks for friends or relatives... charging restaurant or bar customers but neglecting to ring up the sale and pocketing the cash... voiding sales and keeping the cash...and pocketing cash from guests and claiming they left the property without paying.

Revenue fraud the employees are easy to steal money from their office especially if there’s no “people who watching” them. It easy happen in Matt business because of lack of control, Matt can’t “watching” his employees every day. Then the high control of it is in the hand of young couple. Who have the revenue control of motel everyday.

• Purchasing fraud. Kickbacks and bid-rigging are favored scams among procurement personnel seeking to pad their salaries. One example came to light when an astute accounts payable employee noticed that one vendor seemed to be winning the majority of the company's bids for large maintenance projects.

An outside auditor's review of the bidding process revealed collusion between the procurement agent and the maintenance company in question. Each time a third-party bid was received by the agent, he would E-mail the amount to his "preferred" vendor. Hours before the deadline, the preferred vendor would submit the winning bid, under-cutting the lowest bidder by just a few dollars.

• Credit card/identity fraud. Identity thieves use legitimate individuals' personal information-such as Social Security number, credit card number, date of birth and home address-to fraudulently apply for credit cards, fraudulently open bank accounts, obtain cash advances, etc.

Sometimes they steal credit card applications from mailboxes or post offices and change the addresses (usually to a private mail box number they control) and simply wait for the illegally obtained cards to arrive.