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Case Studies

Employee Theft By Closing Out Register
Employee Theft By Returns
Owner Averages Sales to Reduce Tax and Royalty Liability
Prostitution Uncovered as Part of Routine Inspection
Franchisee Offers Bribe
Licensee Reports Sales Based on Cash Collected not Sales
Significant Under-Reporting of Sales due to Holiday Packaging

Employee Theft By Closing Out Register – Most franchise systems are requiring new franchisees to install state of the art Point of Sale (POS) Systems in their stores, however there are long-term franchisee’s who are still operating register systems.

On one particular inspection the franchisee that we were reviewing said that he didn’t suspect any variances as his sister-in-law managed his store. We found a significant under-reporting of sales which turned out to be employee theft. One test that we do is to follow the control number on the z-tapes to insure that all tapes are accounted for. Another test is to track the net change in the grand total numbers. On this particular inspection we found that several tapes had not been accounted for. The manager (sister-in-law) was closing the store most evenings. She would z-out the register at the end of the day, record the sales and make the bank deposit. Unfortunately she wasn’t following the consecutive control numbers on the tapes. We found that on each day that a particular employee was opening the store; approximately two hours after opening he would z-out the register and put the cash in his pocket. Had we not performed the audit and taught the manager to monitor the control numbers, the theft may have continued for a much longer period of time.

Employee Theft By Returns – Most retail establishments accept returned product. However in the food industry there are very few returns.

On an inspection of a candy store we found that they had accepted 10’s of thousands of dollars in returns. Because we had performed several inspections for this particular brand we knew that their returns were usually a small fraction of one-percent. In reviewing payroll records we were able to determine that one particular employee was processing these returns. The employee was confronted by the owner and confessed to ringing false returns into the register and pocketing the cash.

Owner Averages Sales to Reduce Tax and Royalty Liability – This particular franchisee was on a register system and reported sales to the franchisor on a monthly basis. When notified of the inspection the franchisee came up with numerous excuses as to why he couldn’t participate in the inspection. Upon finding a buyer for his store, the franchisee agreed to the inspection as it was the only way the franchisor would allow the transfer of ownership.

Upon arriving at the inspection site the franchisee had a box of information for me. He offered to load it into my car as he didn’t have room in his store for me to work. He also gave me a CD that had his sales information and royalty reports on it. I explained to him that I would need the source documents (z-tapes) to do the inspection. He said that everything I needed was in the box. When I returned to my hotel room I found that the box contained an envelope of cash (a bribe I suppose). I viewed the CD which contained the royalty reports that he had submitted to corporate. When I compared them to the Z-tapes, I found that on each day the franchisee reduce the sales that he reported to corporate by anywhere from $200 - $500 per day to make the daily average reported comparable from day-to-day.

Upon completion of the inspection, we returned the documents and cash to the owner. He said he had no idea how the money got into the box.

Prostitution Uncovered as Part of Routine Inspection – An inspection of a hotel was done after several customer complaints.

Upon arriving at the hotel we found that no night audit reports had ever been generated for the hotel. The manager was reporting sales and royalties to the corporate office based on the amount of cash and credit cards that were deposited into the business bank account.

We printed the night audit reports and found that several rooms were rented multiple times during the same day. As a result of the inspection the franchisee was kicked out of the franchise system.

Franchisee Offers Bribe – A multi-unit franchisee failed a random inspection of one of his franchised locations. He argued that the franchisor’s in house auditor didn’t know what she was doing and that the audit was invalid.

The franchisor chose to hire us as an independent third party to conduct an inspection on another of the franchisee’s locations. When notified of the inspection the franchisee asked us how much they would need to pay us in order for us to say that they passed. We immediately reported this to the franchisor.

Licensee Reports Sales Based on Cash Collected not Sales – Upon notification of the inspection the licensee said that their books were squeaky clean and that we were welcomed to come at any time. Upon arriving for the inspection the licensee had everything laid out and all of their numbers ticked and tied to what was reported to the Licensor. The only problem was that the Licensing Agreement clearly stated that royalties were to be paid based on sales. There was not provision to hold off the payment of royalties until the Licensee collected the revenue.

Significant Under-Reporting of Sales due to Holiday Packaging – The Licensee has always reported and paid royalties timely and were only being inspected as part of a random selection process.

As a result of the inspection we found that the Licensor’s Marketing Department had developed a very successful holiday marketing campaign in which they packaged a licensed T-Shirt and Ball Cap in the same retail package. Although all prior sales for the T-Shirts and Ball Caps had been reported correctly, when the new SKU was set up for the combined packaging, a royalty tracking code was not assigned to it and no sales were reported for either item to the licensor.

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