Restaurant Fraud & Theft – Part I

Today’s post covers fraud and theft of stock items before they are sold or used in your establishment.  These types of fraud relate to purchasing, receiving and inventory stock keeping.  Subsequent posts will cover additional types of fraud and theft.  These posts discuss one of the most important issues facing restaurateurs.
Any theft of product for sale can result in significant sales and income tax liabilities.  So significant, in fact, that it could put your restaurant or bar out of business.  My restaurant tax blog, Canadian Restaurant Tax Advisor, has a wealth of information about restaurant tax audits and their dire implications for you.

Supplier Fraud & Theft
While most suppliers are reputable, some aren’t.  During the recent recession, many suppliers experienced financial difficulties.  Financial pressures can increase the likelihood that suppliers will try to cheat their restaurant and bar customers.  Here are a few examples.
Short Shipping & Over-Pricing
Fraudulent suppliers can follow a practice of short shipping and over-pricing.  The cost to the restaurant can be significant, especially for high volume and/or high cost products, such as meats, seafood, dairy and dry goods.  The restaurant’s chef usually helps cover up this type of fraud, in return for kickbacks, including gifts, sports tickets and money.  If your chef mentions having good seats at a recent professional sports event, you have a theft problem.
Of course, not all such frauds involve your chef.  Some suppliers will short ship goods, occasionally.  You pay for the amount invoiced, but you don’t receive all of the products.  They get away with it, because you don’t check goods as they are received.  You need to verify the quantities and weights of products received to the invoiced items.  occasionally, suppliers will invoice for the amounts ordered, but write on the invoice that some of the items are on back order.  Management needs to be vigilant to make sure the missing items are received on the next delivery.
Linen suppliers are notorious for consistently under-ship on weekly linen deliveries.  In one case, a linen supplier significantly under-delivered napkins and table cloths every week.  In some cases, the restaurant had to call the company for an emergency delivery of linen as they were about to run out.  The linen supplier invoiced the restaurant for the “additional” linen and for an emergency delivery charge!  Don’t let this happen to you.
Though this isn’t a fraud, linen companies will rarely tell you when you are ordering too much linen.  As a cost-conscious restaurateur, you need to monitor quantities delivered.  In several cases, I have found that significant “inventories” of napkins and table cloths built up in the restaurants, due to a decrease in customer counts.  The linen companies had not been notified to reduce their inventory and weekly deliveries to the restaurants.
Unauthorized Substitutions
Especially with food suppliers, you need to check the quality of each item received, to ensure that the supplier has not substituted inferior goods (at the superior quality price).  Some produce suppliers will try to deliver not-so-fresh vegetables that will soon end up in your waste bin.  The same thing happens quite regularly with “fresh” fish.  Also beware of previously frozen fish sold as “fresh”.  I strongly advise owners (and chefs) check every delivery and to return sub-standard products.  Not only will you not pay for inferior ingredients, you will be keeping your suppliers on their toes.
Some wine suppliers will make substitutions for the wines that were ordered.  The most common substitution is to deliver wines with a different vintage than the one ordered.  Always check invoice prices to the supplier’s price list.  A small price difference, multiplied by a large number of bottles, adds up quickly!

Coming in or going out?

Delivery & Takeout
When is a supplier delivery not a delivery?  When the delivery person takes stock on his way out!  If you don’t supervise the delivery person, at all times, stock can go out the door just as easily as it came in.  Also, make sure all goods received are promptly placed in their proper storage areas, to prevent delivery people from having easy access to your inventory.
Full kegs can be “returned” along with the empty ones.  Cases of beer, wine and liquor can be removed on trolleys and quickly sold to other restaurants, netting the delivery person a nice side-income.  High-value meats, seafood and dry goods are easy targets for unscrupulous delivery people.  Again, these items are easily saleable, if they aren’t consumed personally!
High-value supplies are also susceptible to being walked out the back door.  Boxed wine glasses are particularly good targets, but lesser value items like boxes of candles, take-out containers, boxes of condiments, and even toilet paper, can disappear from the shelves during “deliveries”.
Inventory Theft
Once supplies and products are in the door, your staff has an opportunity to grab a “deep discount”.  Allowing staff to bring knapsacks, sports bags, opaque plastic bags, and environmentally friendly totes gives them the perfect means to conceal and transport your stock out of the restaurant.  High-value, low bulk items are particularly good targets for these bandits.
Staff tend to steal the items they need or want.  A server with a taste for Pinot Noir will tend to slip these wines into their knapsacks before leaving the restaurant.  Everyone needs food, so it shouldn’t be surprising if food items in inventory regularly go missing.
Some products don’t even have to be concealed.  A bold bartender can fill a bottled water container with almost half of a bottle of Belvedere vodka and walk out the front door with it in his hand.  Worse still, you won’t suspect this employee of theft, because you think that he or she doesn’t drink (or at least not much)!  It doesn’t have to be alcohol poured into water bottles, I’ve seen high-priced extra virgin olive oil and truffle oil “concealed” this way.  Staff who cycle to work often have opaque water bottles, which are even better at concealing stolen alcohol.
Dishonest employees can put saleable stock items into garbage bags, to be picked up after their shifts are over.  One way to combat this theft method is to periodically check the contents of garbage bags put out for collection.  Another, easier, way is to use clear garbage bags and inspect as many as possible during each shift.
Final Thoughts
This post covered some of the more important thefts and fraud involving inventory from receiving to safeguarding.  Subsequent posts will examine other types of fraud and theft in restaurants and bars.

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