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When it comes to fraud risk, one area of particular concern is procurement. Restaurants have faced many challenges in recent years, including supply chain disruptions, economic volatility and labor shortages. As travel rebounds, many hotels are focused on meeting changing consumer expectations while ensuring financial stability. This focus means many restaurants lack procurement due diligence, creating lucrative opportunities for fraudsters. It is estimated that restaurants lose 5% to 6% of their annual revenue due to fraud.
Unless you have the right systems and controls in place, procurement fraud can be hiding in plain sight within your organization. If undetected, these activities can have serious financial impacts, including direct losses and indirect costs from investigations, regulatory fines and remediation actions. Incidents of fraud can also damage your reputation and guest loyalty, leading to significant revenue losses over time.
While procurement fraud is on the rise, sophisticated procure-to-pay (P2P) solutions are an effective way to protect your business’s supply chain from malicious activity.
Changing Procurement Fraud Risks and Regulatory Standards
In 2022, the Association of Certified Fraud Examiners (ACFE) found that the average fraud loss in the food service and restaurant industry was $579,000. Researchers say the hospitality industry faces higher fraud risks than other industries, particularly because hotel supply chains tend to be more extensive and labor-intensive, creating more areas of exposure.
Additionally, many hotels still rely on manual, paper-based processes throughout the purchasing cycle. In fact, nearly 90% of small and medium-sized businesses still use paper or PDF invoices. These outdated systems have more manual touch points that can expose confidential information. They also make it more difficult to implement consistent and comprehensive controls, leaving restaurants more vulnerable to attack.
In the UK, procurement fraud rose by 13% last year. As businesses and individuals grapple with inflation and cost pressures, many may be incentivized to defraud hotel buyers or employers. Additionally, the growth and sophistication of cybercriminals poses an even greater threat to hotel procurement functions. In September 2023, a cyber attack on MGM Resorts International cost the company more than $100 million.
How to position the hotel purchasing system? Insiders or outside vendors may attempt to submit fraudulent purchase orders (POs) for financial gain. This can be accomplished by manipulating pricing, order frequency, or item descriptions on purchase orders. Some fraudsters may split large orders among multiple purchase orders, making it difficult to report if the final amount is below the hotel’s purchase control threshold. Insiders may also try to manipulate accounting records—for example, by exaggerating the quantities of goods purchased.
Unlawful pricing, where suppliers unfairly increase prices to reduce competition, is common. Suppliers may participate in kickback schemes that involve bribes in exchange for preferential treatment. Procurement fraud may also simply mean that the supplier intentionally failed to deliver the goods or services in the agreed upon quantity paid for by the hotel.
In the UK, the Financial Reporting Council (FRC) announced the hospitality industry as a priority industry for audit inspections in 2023 and 2024, with a focus on fraud risk monitoring. FRC priority sectors are those where risk is extremely high and may be subject to increased scrutiny and financial penalties for non-compliance. If the potential for fraud losses and loss of consumer trust weren’t enough of a motivating factor, this regulatory environment is pushing hoteliers to invest in adequate procurement fraud controls.
Be proactive about procurement fraud
Manual analysis alone cannot accurately identify errors, mismatches and other red flags throughout the hotel purchasing process, especially at scale. Automating the procure-to-pay cycle through sophisticated software eliminates the need for these fraud-prone manual tasks and makes procurement transactions more transparent and secure.
For example, P2P software integrates hotel purchasing activities and allows purchasing teams to automate more rigorous approval workflows. This facilitates consistency in approvals and ensures that only a few authorized personnel can initiate and approve purchases.
Additionally, these platforms include comprehensive libraries of your approved suppliers. Procurement professionals can then easily access supplier contact information, certifications and performance history insights such as delivery schedules, order accuracy and contract compliance. Being able to verify supplier credentials and keep transparent records of their activities enables hotels to prioritize reputable suppliers and avoid working with those that are riskier.
Automated P2P systems also allow hotels to reduce or eliminate paper-based practices through electronic purchase orders, invoicing and payment practices. Digitizing these activities reduces the potential for errors and manual work, and makes it easier and more accurate to track procurement transactions. For example, P2P systems can automatically perform three-way matching to prevent fraud such as double billing.
Hoteliers will further benefit when P2P automation is supported by advanced data analytics and artificial intelligence. Procurement professionals can use these capabilities to instantly monitor transactions and identify suspicious patterns or anomalies that may indicate fraud. Hotels can respond proactively rather than only after an incident has escalated, which in some cases lasts days, weeks or months. Early detection and response are more likely to minimize financial and reputational impact, while making it easier to investigate and resolve issues. Industry research shows that anti-fraud controls, including proactive analysis, can increase fraud detection speed by up to 50% and reduce losses by 54%.
Stay safe with a procure-to-pay platform built specifically for the hotel industry
These capabilities all point to hoteliers with increased procurement transparency and control, reliable supplier relationships, and more proactive risk detection and management. A preventive approach is the best response a hotel can take to combat fraud against purchases, especially when recovering funds and regaining the trust of guests, stakeholders and regulators is not always feasible and may take years .
If your restaurant has experienced or is susceptible to procurement fraud, a P2P automated system is a prudent investment to stay secure and compliant as risks evolve. P2P platforms designed specifically for the hotel industry, such as FutureLog, can further optimize your spending capabilities while reducing the risk of fraud, errors and irregularities.
About future diary
FutureLog provides a fully integrated, cloud-based purchase-to-pay platform for the restaurant industry. We facilitate the end-to-end procurement process from procurement to inventory management right through to invoice processing; all available on one platform to save you time and money. The FutureLog Procure-to-Pay platform is the foundation for seamless connectivity between hotel operations, corporate centers and suppliers.
Suzanne Ward
Vice President of Digital Marketing and Communications
+41 41 759 1861
Future Log Co., Ltd.
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