Identify Red Flags for Hotel Fraud
Pride, greed, lust, envy, gluttony, wrath and sloth are commonly referred to as "The Seven Deadly Sins".
In the world of forensic accounting there is a somewhat similar collection of cautioning indicators called Red Flags.
Unfortunately for us, the Red Flag list is not limited to seven "sins". As you can imagine, for every hotel's control environment and operating structure the opportunities for Red Flags to emerge can be fluid, especially in the COVID-19 era we are operating.
When Does Hotel Fraud Occur?
Red Flags can occur for a number of reasons ranging from hotel internal control vulnerabilities to behavioral patterns. The existence of a Red Flag does not necessarily mean a fraud is occurring; however, it can be a warning that should be addressed.
Generally, when a fraud does occur and the "post mortem" is performed it is more likely than not one or more of the following Red Flags were evident.
Potential Red Flags of Hotel Fraud
Absence of Effective Segregation of Duties
In short, effective segregation of duties prohibits any one individual from maintaining custodial duties over an asset, having the ability to approve transactions for that asset, and having responsibility for maintaining records and preparing its account reconciliation.
An example is helpful: The director of finance for a hotel can execute and receive change orders, has access to bank accounts, prepares period end bank reconciliations and can post journal entries.
Here's another example: The human resource manager has access to employee files, approves payroll and can unilaterally modify payroll records including bank account information.
Quite often the accounting department in a hotel has limited staff and optimal segregation of duties is not possible. The key is to identify the control flaw(s) and establish mitigating controls. With regard to the director of finance discussed above, consider the following:
- Assign receipt of change orders to another individual who does not have access to cash or books and records
- Establish protocols where bank reconciliations, journal entries, etc. are reviewed above property
- Perform surprise cash process reviews by individuals independent of the hotel
- On a periodic basis require certifications attesting compliance with all policies and procedures
- Perform self-assessments and submit for review and approval
It is quite likely your finance department has undergone significant changes due to COVID where staff has been reduced, remaining staff are wearing "many hats" that result in less than optimal segregation of duties. Please pay particular attention to these areas and identify and assess the severity of the control environment shortcomings.
Vacation
During the onset of an investigation, one of the questions asked is:
"Has the person of interest taken vacation?"
Quite often the response is:
"Why does that matter?"
It is simply untenable to work a full-time job and not take vacation. Not taking a vacation suggests that person cannot let another individual perform his/her tasks for fear that a scheme could be uncovered. Job rotation and cross-training helps address this vulnerability.
Control Issues & Unwillingness to Share Duties
When an individual continually challenges change initiatives, "protects his/her turf", is slow to respond to requests, constantly misses deadlines, works late or odd hours, could be an indication that he/she does not want others gaining access to their activity.
Lifestyle Not Consistent with Compensation
Does the accounts payable clerk drive an extremely expensive car, take extravagant trips or wear expensive jewelry?
There could be a very logical explanation (marital assets, inheritance, lottery winnings, other financial windfalls, etc.) and must be handled with care.
An important ingredient is the effectiveness of the ethics hotline. If employees trust the hot line process, it is possible other employees have noted the same and have submitted concerns. At a minimum, a holistic review of the clerk's roles, responsibilities, access rights, etc. should be considered.
Personal Pressures
In the 1950s, Donald Cressey, a criminologist, performed an exhaustive study of fraud and concluded the act of committing a fraud generally includes three elements: opportunity, rationalization and pressure. This concept has been long noted as "The Fraud Triangle".
Personal pressure can manifest itself in many ways such:
- Addiction (drug, gambling)
- Divorce
- Investment losses
- Excessive mortgage and/or credit card debt
- College tuition
- Uninsured losses
Such difficulties may thrust someone into attempting to mitigate their personal financial challenges at the detriment of a hotel. Again, COVID-19 lends to this Red Flag. Everyone is enduring one form or pressure or another during this time of uncertainty. Leadership should continue supporting an nurturing working environment and maintain awareness, whether apparent or not of pressure all are under.
Detecting and Preventing Hotel Fraud
Proper internal controls reflect effective preventative and detective measures. Preventive measures are proactive controls that among other things, attempt to deter or prevent improper activity.
Detective measures, among other things, are reactive type controls that attempt to detect improper activity. Detective controls check and balance preventative controls.
In certain circumstances, investigations noted management was aware of a particular preventative measure Red Flag but mistakenly relied upon ineffective detective measures to mitigate the vulnerability.
There is a saying "what gets written, gets done". It is advisable to take a proactive approach in recognizing and acting on possible Red Flags.
