5 Alarming Incidents Exposed by Financial Compliance Auditing
“Financial compliance auditing is often understood to be a task for the business accountants. This perspective, however, is somewhat flawed, since to achieve true financial compliance throughout a business, one must first understand the many layers within which it functions.
In our experience, most bar, restaurant, pub and hotel businesses have a great deal of helpful financial controls in place at top level. The point at which many, especially the multi-site operators, tend to fall short, is the checking of financial compliance at site level. It’s why, so often, we visit venues and uncover incredibly damaging incidents that could have been so easily avoided.
Today, I’ll talk you through just a few of these types of incidents, as well as what checks would help to prevent them ocurring in the future.”
– Duncan Colvin, Head of Compliance, Venners
1. Unrecorded safe checks lead to £3,000 worth of losses
Not monitoring your estate’s safe floats and cash balances, can allow poor practises to creep in at site level.
A site may be asked to declare the safe balance daily or weekly and often no further checks are made by head office to verify the records.
Our financial compliance auditing team found a pub site that had started ‘subbing’ staff wages and a series of IOU’s made up a significant balance of the float. Further petty cash purchases had no matching receipts and remained unprocessed.
Clearly the float had soon depleted to a point where the business struggled to service the tills with change. To combat this, the daily bankings were delayed, using the cash for change and whilst one day late became two, which then became three, head office was reassured that the declared banking was hitting the statement and the float was confirmed weekly.
Our audit assessed the cash position as part of its standard checks and confirmed the debt to the company at over £3000. A decision was made to take disciplinary action. The audit brought the poor cash management to a halt and the company has now introduced a more stringent cash and bankings policy, audited routinely by Venners Compliance.
2. Staff discount abuse exceeds 15% of monthly turnover
Offering staff a great deal on off-duty purchases can be widely abused if not monitored correctly.
For many companies, the desire to offer discounts for staff to use off-duty or free meals whilst on break ought to be balanced with stock control and reporting. There is often a till function or card swipe to record the discount or staff meal. But who is monitoring the volume? Is a policy in place for staff to adhere to and are penalties enforced?
Financial compliance auditing checks on the till system made at one site identified that all staff meals were registered against the same staff member, whose card was left next to the till. This eliminated any ability to check specific use by staff. In another site staff were logging entries but checks on free meals against rota use found many off-duty staff claiming free meals rather than at the discounted rate agreed.
It sounds harsh to label this sort of activity as fraud, because it so often starts without any malicious motive, but rather begins with a mistaken entry. Soon, however, it becomes apparent that no checks are in place and word spreads amongst staff, whereby opportunists will gladly make use of the unfortunate loophole.
Observations made whilst on a site by our auditor working at a bar table also witnessed staff discounts being applied to regular customer purchases. Meals or discounted drinks served were recorded to deplete the stock and routine stock takes had not highlighted the abuse. Newly introduced financial policies had prompted the checks at all sites and abuses appeared to exceed 15% of turnover per month at the worst site.
The company has now strengthened their staff eating policy, requiring each staff member and manager to sign till receipts. Further, the weekly records of discounts and staff meals are tabulated and form part of the weekly reporting to HO. Acceptable levels have been agreed and now that records are being made, benchmarks can be analysed.
3. Incorrect deposit records cause cash flow crisis
How do head office know that the deposit ledger is accurate and being kept up to date? On site checks are often the only answer.
Covid 19 lockdowns and partial openings have resulted in a significant number of deposit refunds being made. But what if the original deposits were not properly recorded or indeed the monies fraudulently removed from the business.
A small hotel company introduced financial compliance auditing and as a routine check, Venners were asked to check deposit ledger entries to ensure they had been correctly recorded and applied when redeemed.
Inspection at one site found that, in error, the deposits were being processed as revenue on the day of receipt. There were actually no deposits recorded, despite a fairly full diary of upcoming events. The inflated sales were having a positive impact on the GP reports in the week of receipt, but adversely affected the profits on date of event as only the invoice balance was recorded. The variations were not initially picked up until a number of deposits needed to be refunded due to Covid Lockdowns.
Routine financial compliance auditing will detect this issue before it causes a cash flow crisis as was suffered here, indeed, simple mistakes like this, often turn to fraudulent activity as a manager realises that deposits are not being tracked.
Any head office function will be unaware a deposit is due to be banked unless declared by the site. It is only with physical checks of diaries and correspondence on site that an auditor can establish any missing deposits.
4. Missing statutory signage leads to fines
Keep those legal notices up to date and clearly visible to avoid hefty fines.
In an increasingly litigious society, we are required to have a number of legal documents on display or to hand. Larger firms are increasingly turning to digital record systems, but smaller firms must rely on regular checks to ensure all managers keep their sites legal and compliant.
Auditing for large national pub chains, our auditors regularly spot missing or out of date bar tariffs and hotel ‘rack rate’ signage. More often, the signage is found to be hidden by a promotional poster or menu inserted over the tariff in a clip frame. A company sales team with a drive to boost seasonal sales often miss the legal requirements of notices and whilst not as pretty as a Christmas deals poster, these are just as important to the business, as they can result in hefty fines if not visible.
Staff notice boards too, can become cluttered and not kept up to date. A legally required H&S poster will be covered by overhanging notices and soon lost behind pictures of the latest staff party.
Third party financial compliance auditing can ensure that legally required notices, tariffs and certificates are not only on displayed, but that they are up to date and clearly visible. The business benefits by retaining a professional edge and avoiding hefty fines.
5. VAT reporting results in huge losses
Companies can lose thousands with poorly recorded petty cash purchases.
Our auditors are regularly asked to review the petty cash records of the sites for a business. Often the petty cash receipts are retained locally, and entries are made directly into an accounts or payment management system on site by the manger.
Restaurant, pubs, nightclubs, and hotels rarely recruit their management team based on their expert knowledge of VAT and they often do not fully understand the implications of not correctly recording those purchases on which VAT was paid.
Mixed purchases form a supermarket are often poorly recorded and when a larger payment of a VAT able item has been made, no VAT receipt has been requested or processed.
Our audit team can not only spot when errors have been made, but often can determine the level of the manager’s understanding. Auditors will explain the need to save as much as possible from VAT paid, by correctly claiming on paid out VAT and which documents are required. A small example of how external financial compliance auditing can ultimately help to tighten a business, improve procedures, and save money.
Cash and revenue control lost in day-to-day operations
As a company grows, often the focus is on building revenue and driving the management team to offer outstanding service. The detail of cash and revenue control can be lost in the fog of day-to-day operations. Appointing a third-party audit team to be at your side as your company grows allows for confident growth and minimises unnecessary losses.
Operators looking for financial compliance auditing to support effective cash and revenue control should visit www.venners.com/compliance for further information.