Easy Come, Easy Go

Examining Fraud on the Loading Dock

By By Frank Luizzo, CFE, and Joel Moskowitz, CFE

Recently, in Las Vegas, the chef in charge of a restaurant in one of the better known hotels was terminated when management learned that the chef was ordering items for the hotel’s gourmet restaurant and diverting them to his own restaurant in a nearby upscale neighborhood. The items were delivered daily by the same driver to the hotel’s loading dock, where the chef would always inspect and sign for the delivered items.

Red flags went up when an audit conducted on the restaurant over a six-month period showed that more than half of the food items coming in were never sold. In reality, better than half of the items ordered were never even delivered to the hotel, but – upon the chef’s direct orders – were taken straight to the chef’s own restaurant, where his brother would receive the goods. The chef’s restaurant, not surprisingly, was a huge success, and it was partly due to the restaurant’s reputation that the hotel managers were able to put the pieces together and figure out that their best chef was ripping them off. The extent of the fraud was so extreme that the accounting department later learned that even the toilet paper used at the chef’s restaurant was paid for by the hotel.

The loading dock plays a critical role in a company’s ability to function profitably. A poorly run loading dock is a death sentence for an otherwise vibrant business. The functions that take place on loading docks are as varied as the businesses themselves, but the one thing common to all docks is their vulnerability to fraudulent activity.

Generally, loading docks serve two distinctly different functions: shipping and receiving. Depending on the type of business, the dock functions may be heavily weighed in one direction or the other. The resort industry – hotels, casinos, and amusement parks, for example – primarily receive products, while retail Internet sales primarily are involved in shipping. Manufacturers, additionally, have products flowing in both directions.

Numerous studies over the years have shown that manufacturers prosper when products received are scheduled in such a way that on-hand inventory is kept at a minimum, and product output is maximized. The bottom line is that businesses with tight controls over dock functions are more likely to be successful in their respective industries. To examine the problem of fraud on the loading dock, here are a number of cases involving hotels, restaurants, and retail stores.

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