Franchise head offices cannot afford to just have a ‘tick the box’ approach to financial reporting, compliance and management throughout their franchise networks if they are truly serious about tackling the issue of fraud.

In the second of his two-part series of articles on the risks of fraud in franchising, David Morgan, a Principal of Forensic & Risk Services at PKF Accountants & Business Advisors, looks into some of the proactive and practical steps that franchisors can take in this area.

In his first article, he raised the concept of implementing integrity training in franchisee induction as a valuable starting point in setting the right culture and expectations in a franchise system.

He now expands on this to examine some of the basic operational frameworks that can be put in place to support the culture.

First and foremost, is ensuring every component of the franchise network has sound and consistent financial reporting and management, covering everything from sales and staff payments to how stock is purchased, stored and managed.

“The basis of integrity in a franchise is good consistent reporting from throughout the network, consolidated and on time,” Mr Morgan said.

“It can be difficult to get every store to provide its Profit & Loss statement on time every month, but you need to chase them and then compare them with other stores.”

“In a franchise business with multiple stores or outlets, it is imperative to dig deeper in analysing and comparing reported financial data to assess how it matches up with average opening hours, wages, customer spends, product usage etc and act on any ‘red flag’ warning signs. If something does stand out, make sure you go the extra step in investigating it. Don’t just tick a box.”

“This approach can be taken to a further level by physically visiting stores to witness their reporting processes and even visiting anonymously in a mystery shopper capacity.”

Mr Morgan said resourcing and communication are also crucial components in ensuring what happens in practice at franchisee level matches the head office policy.

“Franchisors need to ask themselves, do they have sufficient resources and experience in their organisation to effectively manage fraud risks? Also, do they have the communication systems in place for everyone in their network, including field managers, franchisees, staff and suppliers, to fully understand and adhere to the organisation’s integrity policies?”

Franchisors must also carefully manage any external consultants they may engage in areas such as franchisee and staff recruitment or business development and coaching. Extensive checks on individuals and companies, beyond what is on the public record, can be carried out through specialist employment screening and business intelligence services.

Don’t just rely on what consultants say, do your own checks.

“If the systems outlined above are not in place, it creates opportunity for people within your business to do the wrong thing,” Mr Morgan concludes.

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