Bob’s Country Kitchen, a small family-owned restaurant in northern New York, has seen a drop in profitability over the past three years and the owners want to know why. Bob’s has been a local favorite for the past 20 years. Two brothers opened it in the early 1980s because they couldn’t find a burger they liked. Bob’s initially served only hamburgers, but has rapidly expanded to almost all types of American food. Bob’s became so popular in the late 1980s that Tom and Bob (the owners) had to hire several people to help manage the day-to-day activities of the restaurant. Until this point, Tom and Bob had managed the place themselves.
Bob and Tom felt that their new management was doing a good job and so they gradually became less and less involved. In 2005, Bob and Tom gave up all management duties to Joel, a friend of the family who had been employed by Bob’s for 15 years. Bob’s has no computer system in place for customer orders—each order is written on a pad with a duplicate carbon, one copy is taken to the kitchen, and the other is given to the customer. All customers pay at the old cash register at the front of the restaurant, after which their receipts are pegged on a tack and are totaled at day’s end to determine total sales. Bob and Tom have noticed a gradual decline in profits over the past three years and, up until now, figured it was just because of increased restaurant competition in the area.
However, it seemed odd to Bob and Tom that revenues had increased substantially but profits had not.
When asked about the change in relationships between revenues and profits, Joel said it was because of a large increase in the cost of food and that he had to pay his employees more with the increased competition. Bob and Tom have no reason to disbelieve Joel, since he is a trusted family friend. Joel’s responsibilities at Bob’s include preparing the nightly deposits, managing accounts payable, handling payroll, and performing the bank reconciliations. He also has the power to write and sign checks. No one checks his work.
1. What possible opportunities does Joel have to commit fraud?
2. What signs could signal a possible fraud?
3. How likely is it that a few internal controls could reduce the opportunities for fraud?
4. Which internal controls would you suggest be implemented?