Read ‘Em and Weep
Recent news postings at clubandresortbusiness.com have included these reports of fraud and embezzlement in club operations:
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General managers at clubs and resorts are known for being passionate multi-taskers who possess detailed knowledge of countless aspects of their properties’ many operational areas. But if these GMs are not fully conversant in the demands of accounting, and active in instituting effective and consistent fraud controls, they can still be at the mercy of anyone else within their operations who may be inclined to try to appropriate club funds.
Fraud and white-collar crime has reached pandemic levels within corporate America—and, perhaps as an unfortunate reflection of the challenging times that have extended into our industry along with the general economy, many examples of club-related embezzlement and fraud (see box, right) have come to light recently at properties throughout the U.S.
These cases have involved malfeasance not only by CFOs, controllers, accountants and bookkeepers, but also department heads, including a Director of Catering and an Event Sales Director. Collectively, they drive home how all club and golf course operations, and perhaps private clubs most of all, are not immune to the risk of fraud—and how all GMs must become more diligent than ever in guarding against accounting irregularities and lax controls, wherever they might stand to occur.
Before the recent spate of news reports about embezzlements at club properties, a club-specific case study based on actual events, “Accounting Fraud at Deercreek Country Club,” stood as perhaps the best-known example of club-related fraud situations. This case study was developed for classroom instruction at the University of North Florida by Linda A. Hong and Dr. Jeffrey E. Michelman from UNF’s Coggin College of Business.
As depicted in the case history, the actual investigation into fraud at Deercreek Country Club began after it was noticed that a check had been written with an unrecognizable second signature. This discovery started a chain reaction—and, like an onion, the more layers that were peeled back, the worse it smelled. Credit card fraud, wire transfers, the construction-in-progress account not being able to balance, multiple versions of the budget in use, forged signatures, and unreconciled bank accounts all came to light.
Regardless of whether the impetus for a greater focus on the potential problem comes from a flurry of recent news reports or a carefully constructed case history, the next step should be the same: developing a full understanding of all of the controls that are needed to ensure fraud prevention.
Controls: What, and Why?
“Control” is based on a dynamic concept that ensures objectives are being achieved as efficiently as they can by identifying high-risk areas, implementing stringent internal measures, reducing loss and waste, and maximizing profits. Controls should not impede progress; instead, they should be designed to drive an organization forward. Simply put, controls should be implemented to assure that everything goes as intended.
Control is really about taking aim, making sure the means to achieve a goal are in place, and managing the risks that can impair the ability to get there. In the end, control is based on the people you surround yourself with, and on getting them to deliver. If the right people are in the right place, chances are good they will make sure things are done right the first time, and in an efficient manner.
A reality of management is that implementation of strict internal controls will often be met with resistance from a staff. The feeling will often emerge that “Big Brother” is watching, or that management doesn’t trust its employees and is questioning their honesty. The important truth, though, is that controls are designed to protect all employees—and this should be communicated to everyone as they are implemented.
To be the most effective, controls should be directed toward the areas that represent the highest risk. The whole idea of controls is to reduce this risk; they can never eliminate all of it.
Effective internal controls generate important information, ensure compliance with required procedures, protect assets while minimizing losses, and promote economy, efficiency, and effectiveness. An example of this is a club’s ability to implement segregation of duties, which is needed to ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business.
This article is drawn from a monograph written by Paul N. The MCM program recognizes the importance of significant, long-lasting contributions made by club managers to their clubs, their profession, and their communities. In addition, the MCM designation provides experienced club managers with the means to make a significant written contribution to their industry. A link to Kornfeind’s complete monograph is provided with the online version of this article at clubandresortbusiness.com. All monographs written through the MCM program, along with their Executive Summaries, can also be found on the “Education” section of the CMAA website (www.cmaa.org) For more background on the MCM program, see “Mastering the Job” in the January 2010 issue of C&RB (the article is also online at www.clubandresort business.com/article/8749). |
Effective segregation of duties provides two benefits: 1) a deliberate fraud is more difficult, because it requires collusion of two or more persons, and 2) it is much more likely that innocent errors will be found. At the most basic level, this means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities accordingly, to ensure a crosscheck of duties wherever possible.
An example of poor segregation of duties in a club would be having the same person open checks, post them to members’ accounts, and prepare and make the daily bank deposit. A more efficient example would be a club where the receptionist opens and stamps the incoming checks “for deposit only.” The accounts receivable clerk would then post the payment to the members’ accounts or to the proper general ledger account, and the controller would prepare the deposit. Finally, the manager, or someone who has no connection to the accounting department, would make the deposit in a locked bank bag.
Basic Control Standards
In addition to segregation of duties, here are some other examples of basic standards and control procedures that should be present to minimize risk in club operations and to protect members’ and staff’s interests—and, hopefully, help to produce positive financial results:
Staff members should need to seek authorization of important transactions that have a high value. The act of authorizing brings another employee in a supervisory role into the mix. This could prove to be a very valuable system of checks and balances.
Learning from Painful Experience
Paul Kornfeind was born and raised in Chicago, Illinois. He started his career in club operations as a caddy at Sunset Ridge Country Club in Northfield, Ill. at the age of 12, and later worked in the kitchen and advanced to the Executive Sous Chef position, before entering college to pursue a formal education in hospitality management. After graduating in 1989 from the University of Wisconsin-Stout with a bachelor’s degree in Hotel & Restaurant Management, Kornfeind worked his way up through the management ranks at clubs in Michigan and the Chicago area. Since November 2007, he has served as General Manager and Chief Operating Officer at Tippecanoe Lake Country Club in Leesburg, Ind. Paul currently resides in Leesburg with his wife Julie. He enjoys playing the blues on his bass guitar, and spending time with friends and family. In February 2008, Kornfeind earned his Master Club Manager (MCM) designation from the Club Managers Association of America (CMAA), becoming the 15th club manager in the world to earn the designation since the program was instituted in 1990. The path to earn the MCM designation was “a long and winding road,” he says, but one he has no regrets about taking. “The MCM designation was a professional goal of mine for over ten years,” he says. “Along the way, I was able to network with managers from across the country, visit some incredible places, and learn from some of the best collegiate instructors at some of the top hospitality schools in the world.” A primary motivation for earning the MCM designation, Kornfeind adds, came from the opportunity to give back to the industry. “I experienced a major career setback due to the actions of a dishonest bookkeeper who worked for me,” he explains. “I wanted to select a topic that could help prevent other managers from suffering a tragic blow to their careers. “Theft, fraud, and embezzlement can happen at a club at any time, so managers must always be alert,” Kornfeind adds. “If my research and suggestions for internal controls can help protect clubs and keep someone from losing their job, it was worth every minute spent.” |
Security is another important control, to keep unauthorized persons away from valuable items or information. Physical security is self-explanatory; to protect electronic databases, passwords, firewalls, and other systems are needed.
For computerized transactions, identification codes create a log of who has accessed the system, and provide an audit trail. Consider, for example, a copy of a chit received from the dining room (where this system is still used). It should contain the server’s name, the date, a record of products consumed, and the amount that will be charged to the member’s account.
Verification is another important concept for physically confirming that a club has all products it ordered, received, and paid for. Stock checks, inventory reconciliation, inspections, and asset checks can all help managers exert control over theft-prone items.
Control totals allow managers to compare recorded transactions against actual sales. For example, one can compare the number of porterhouse steaks sold (via a daily point-of-sale report) against actual inventory, minus any waste (i.e., an overcooked and returned steak). An additional level of security in this example would be to have the manager on duty, or chef, verify that the steak was indeed overcooked, and not given to a bartender in exchange for drinks to the kitchen/wait staff.
Supervisory accountability involves having supervisors share the responsibility for ensuring that control systems are in place, and that department heads are monitoring them. In theory, monetary rewards for achieving the financial goals of a club will drive this process and encourage tighter internal controls. On the other hand, problems involving managers whose departments fall short of the club’s financial goals should be documented—and become a main point of discussion during performance reviews. General managers who adhere to this process are more likely to have department heads who are focused on controls and achieving established goals. More than anything, managers should seek to establish a control culture, in which all team members share the collective desire to get things right.
In implementing these and other internal controls, the trick is to find the right balance between no controls and those that are too strict and impede forward progress. This balancing act involves more than simply having a contingency plan “to cover us when something goes wrong.” When there is too much risk, something will probably go wrong. But too much control is just as bad, because there will be little progress toward the team’s collective goals.
Recent trends presented as replacements for traditional supervisory management—including downsizing, empowerment and increased delegation, process re-engineering, and coaching—have not changed the need for general managers to be primarily responsible for delivering the right things and achieving results. They must continue to set high standards and develop a culture where these standards are the norm.
Still More That Can Be Done
Unfortunately, a recent survey of private club managers (see box, opposite page) revealed that some standards of accounting control are clearly more “the norm” in the industry than others—and that very few are universally pervasive. It is worth general managers’ time to review all of these possible control measures to determine 1) if those that are already in place at their club are working as effectively as they need to, and 2) if others that aren’t in place should be added. More so now than ever, general managers, as those responsible for everything that happens on their watch, can’t be too careful in how they try to make sure all lines of possible defense against fraud are in place, and that no holes exist within any of these lines.
If fraud happens at your club on your watch, the immediate damage that can be done to your career will be severe—and the time and effort needed to recover from it will be lengthy and arduous. Even though you did not commit the crime, you will still lose the trust of the Board and the membership in your ability to be an effective leader.
Trust—between you and your staff—is also a critical factor in how you can prevent fraud from ever occurring. While all good managers want to develop and convey a feeling that they trust their employees, trust is a gift that needs to be earned, and not just passed out like candy on Halloween. No matter how much you think trust is in place and is providing the needed protection against fraud, it never hurts to try to find new ways to confirm that it’s still justified.
Another question in our survey of club managers (not included in the box ar right) asked: Do you ever double back to the club late at night, to see what is going on while you are gone? Over 93 percent of the GMs surveyed said they did make it a practice at least once every three months or so, and in many cases on a weekly basis, to make an “unplanned” return to the club after they had “left” (one manager went so far as to switch cars with his wife or a friend, to help avoid any advance notice of his return).
Some managers’ reports about what they learned through this practice confirmed that “When the cat’s away, the mice will play.” One witnessed cases of liquor going out the back door; another now had answers for why his food costs were so high.
Practices like these don’t betray trust, they reinforce it. And occasional reconciliation of the actions and procedures of those to whom trust has been extended can be very beneficial for all parties.
Internal controls, in all forms, are proactive concepts that cannot be taken lightly. Once the crime has been committed, you can’t get the toothpaste back in the tube. To minimize any potential messes, follow as many fraud prevention steps as possible, keep your eyes and ears open, and most importantly, keep your finger on the financial pulse of your club at all times.
Closing the Lines of Defense
In researching his MCM MONOGRAPH on accounting fraud at private clubs, Paul Kornfeind sent surveys to 800 club managers randomly selected from the membership roster of the Club Managers Association of America (CMAA). The survey asked 60 questions about accounting practices, controls and fraud prevention techniques being used throughout the club. Nearly 200 survey responses were received. Here are some of the questions, and how the tallies for each reflected existing levels of control and protection in the club industry (for Paul Kornfeind’s insights into the value of each of these measures, see the full monograph with the online version of this article, at clubandresortbusiness.com):
Does your club have:
Does your club use:
Does your club accept cash? (Yes 47.9%)
Are all dining-room voids approved by a department manager and reviewed by the accounting office? (Yes 69.7%)
Do you as GM:
Do you require your pro shop:
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