Curbing Fraud in Your Spa/Salon

By Skip Williams

Disclaimer: Attention Spa / Salon Owners: Someone reading this article may learn new ways of theft. We are not responsible for any losses that may be incurred. If you are an Owner it is now more important that you read this column and take appropriate action and let others read this at your own risk.

Writing about a subject such as Fraud or Theft often makes me sound like I am mistrustful of people, for the record I am NOT. I truly believe that most people are trustworthy, loyal, honest and hard working most of the time. There can from time to time be a bad apple in the bunch that can cause an incredible amount of havoc for both Spa/Salon Owner and fellow Employees. It is to those "bad apples" that I dedicate this article in the hope that a business properly safeguarded will keep you honest or spur you to move to our competitions business.

In many industries "Fraud" can never be eliminated, it can only be "Minimized"; our industry is no different. The opportunity to steal is ever present. Sometimes theft is not even thought of as theft by the employee.

Most would agree that if someone trusted with the "cash drawer" takes cash out and puts it in their pocket, that is fraud or theft. From there however we are dealing with shades of gray, some shades are darker than others some are so light that different Owners may define them differently.

When I need a pen or a manila folder and take it home is that theft? If a Provider takes some "back bar" materials home for their own use is that theft? What if he/she takes it home to work on Clients of their own? If a Manager abuses their "Entertainment Budget" is that theft? How fraudulent is it when a Provider offers their services to a client outside the Spa/Salon? Is it different if it was unsolicited, the Client asked the Provider? Use or over use of the telephone? Encouraging clients to use, or providing Clients with, coupons or special offers?

I know many Owners that would contend that all or most of those "shades of gray" are fraudulent practices or outright theft, however Employees often may not. Many Owners may not be aware that these opportunities and many others are tempting their staff daily.

Policies

The first line of defense is to clearly establish the boundaries, darken up those shades of gray that most worry you. Write clear policies that outline what is NOT tolerated, what the appropriate disciplinary action is, and whose responsibility it is to seek out these "frauds".

For example: Thousands of dollars are walking out the door of many a Spa/Salon in the form of Clients business that is now being done at the home of one of their Providers. Different levels of "solicitation" are taking place. Some are outright asking Clients that come to the facility regularly, some hint at the fact that they treat Clients outside the Spa/Salon through the course of a normal conversation, and some are doing no solicitation but are asked by Clients if they work outside the facility.

Where do you draw the line, what is your policy, how do you enforce that policy, and who is on the lookout to make sure this does not happen? I find all too often, Managers ignore that this form of fraud happens, and just hopes and prays that the Owner does not find out and that the Providers do not get carried away.

To an Owner the saddest part is that it is often the Best Providers taking the Best Clients home with them. Policies are critically important for dozens of reasons but for fraud in particular.

Checks and Balances

The level of "Checks and Balances" is directly proportional to the level of involvement by the Owner. If the Owner is at the front desk all day, everyday, then the checks and balances necessary for cash drawer accounting are significantly less than that of "the absentee Owner".

Let us review a few areas where C&B’s are necessary, I will talk to the highest level of C&B, the absentee Owner, those Owners that are more involved can take from these more extreme measures what they need. I will also talk as though I was the dishonest employee whose goal in life is to "rip you off", even though in real life I am a really honest sweet guy… really… honest!

Coupons, never! When a Client receives services for a "coupon special" but does not present a coupon, I can take a coupon out of my pocket and put the cash difference in my pocket.

Not only do you think that all your customers are now happy, you think "what a successful marketing campaign". You now have less money in your pocket and bad marketing information; I am not sure which is worse.

Solution: Have a Sale, lower the programmed price at the cash register, if you want to have a special go ahead and advertise it, go ahead and give the great price to everyone, just make sure it is programmed into your cash register or price menu. Then the money (savings) is getting into the hands you intended, and now your customers really do love you.

Gift Certificates, be careful! If gift certificates are not done with serial numbers, logs, and an ironclad way of making sure your system can NEVER take the same certificate twice then forget it. If you want to offer gift certificates you will need copious control in the "Closing Review & Reconciliation" (see next item) and still you may not have closed the door.

I am your employee, I am short on cash this week, I buy a gift certificate with my employee discount (let us say $100 certificate for $80). I use it to pay for a Clients service; I take his/her $100 put it in my pocket, net profit to me $20.

Possible Solutions:

• Banning Employee discounts for gift certificates may be extreme; this is a very nice benefit to your honest employees that you are taking away because of one bad apple.

• Look for gift certificates with close or same dates between purchase and redemption, which requires more vigilance.

• Require all Employees discounted sales first are approved by the Manager.

Closing Review & Reconciliation, always! Careful closing review is imperative, on a daily basis the previous day’s receipts need to be reconciled by two levels. The further time that elapses between closing and review allows memories to get foggy, and makes corrective action difficult.

Here I am Mr. Dishonest, reporting wrong deposit amounts, double redeemed gift certificates, paying out credit card refunds that you know nothing about. Without those C&B’s I am going to be doing this often.

First the Manager must look for anomalies, verifying for all the treatments that a Provider reports (you do have Provider reports, right?) they have done, are indeed entered into the front desk system. Managers can learn a lot of other important information besides bookkeeping from this exercise, you may be surprised. All comps must be fully understood and dealt with (see below), tips accounted for and split according to your Spa/Salon policy and gift certificates sold and redeemed reviewed. If a Manager lets a faulty closing go through it is now their responsibility and this is where the corrective action needs to take place first.

Second your Controller or Bookkeeper must review & reconcile, he/she must tie cash drawer, deposits, credit card "Z" tapes, gift certificates, discounts, comps, and then do this again when the bank statement arrives to be sure you deposit slips etc. were indeed what they were suppose to be. It is very important that the loyalty of this person is to the Owner. Important that he/she feels comfortable coming to the Owner when anomalies arise and a confidential relationship develop. Likewise if the Controller lets discrepancies slide they should be called on the carpet.

Whoever touched it last and passed it should be the person dealt with, never accept the answer that someone else made the mistake, missing a mistake is more egregious than making the mistake.

Owner/Manager makes the deposits! I am a front desk closing person, I have been instructed to make the "night deposit". It is around the first of the month, I do not like my job, and I plan on leaving your employment soon. I short the deposit bag by a few hundred everyday, but I make a deposit slip copy (the yellow one) for the correct amount and leave it with the closing report. A few days before the end of the month I quit, you pay for a nice going away party for me, and will not know for about 10 more days just how must I stole from you.

I prefer the Owner to make the deposits but when that is not possible I recommend that the Manager or Controller make the bank deposits. Caution, a Manager or Controller could pull this same scam, but it is less likely if this is their chosen professional career.

Detailed Comp Reports or Guest Incident Reports. For more than just accounting reasons detailed comp reports should be required before any comp or special discount is given. Indeed if a customer was upset or concerned enough to say something to ANY employee, even when not affecting receipts, a report should be made and Management should review daily, and follow up. If not enough information was given in the report the Manager should investigate, not in an accusing way, but, in an information gathering way, so that the Client can be contacted, corrective action be taken, or processes changed. From an accounting point of view, the process of having to give a detailed explanation, possible further actions or follow-ups being made should be enough to keep comps legitimate.

Vigilance

Even with all the "Checks & Balances" in place, the opportunity for fraud can still exist. The more C&B’s we have in place the less temptation for our Employees and the more we show them how little toleration we have for such theft. Still collusion between two or more Employees can destroy even the best C&B systems; there is no substitution for Vigilance.

Nothing replaces Owners involvement. The more time an Owner spends caring about every transaction, every Client, every Employee, every treatment, everything in his/her facility, the more tuned in they become, the less chance for fraud, collusion, and theft. The more we care about others well being, the more they will care about ours.

I believe that while the direct loss of capital due to fraud can be significant, but the collateral damage can be even more devastating. The loss of customers, the corruption of the data and information you were collecting, the disruption of the staff, rumor mills, the sense of betrayal, legal matters, community reputation, etc. could each take months to recover from.

When I have consulted in this area I have found it enlightening to spend at least 2 days doing nothing but observing the operation. Believe me when you have nothing else to concentrate on for 16 plus hours you can do a lot of fine tuning of your processes, and second-guessing your Checks & Balances. This investment of time will pay for itself many times over not only in the form of cash but also in form of sleep at night. In order to curb the fraud we have to spend some time thinking like that dishonest Employee long before any Employee has the opportunity to think dishonestly.

Now that I have Owners completely paranoid, I must repeat that I believe most Employees are honest and hardworking. Similar to the saying "good fences makes good neighbors" I say, "tight accounting makes honest Employees".

Human nature being what it is, under the right conditions, when confronted with a temptation will sometimes (if not often) get the best of any of us. Each time the fraud takes place it then becomes easier for someone to fall prey the next time.

As Owners we owe it to our Employees to:

• Set the boundaries
• Limit if not eliminate the temptations
• Be involved

Below is an accounting flowchart that has worked well for me in the past, I hope it is helpful to you.