Auditing for compliance related to the management of cash, merchandise and employees is not an easy task for any retailer. But it is even harder if a business is both a restaurant and a retail operation.

That is the situation at Hard Rock Café, which derives one-third of its sales from the retail operations that sell T-shirts and other memorabilia.

“We’re unique in that we are both a restaurant and a retail operation,” says Dave DiPerna, Hard Rock director of accounting. “Our restaurant managers are used to running a food and beverage operation, but most have little retail experience.”

That issue becomes even more complicated when it comes to auditing and compliance control. “Restaurant managers focus on issues like sanitation and food spoilage,” DiPerna says. “They’re not familiar with all the issues associated with shrinkage, which is a big issue for a retail operation.”

Further complicating matters is the fact that Hard Rock operates 47 locations across North America: It is expensive and time-consuming to have auditors flying all over the country to keep tabs on its operations.

Several years ago, Hard Rock decided to outsource the auditing function to LP Innovations, a Milford, Mass.-based company.

In addition to conducting audits, LP Innovations would provide investigative services and provide a business abuse line that allowed employees to report suspected cases of fraud or personnel violations.

Hard Rock’s initial goal was to reduce the costs associated with audit-related travel. Because LP Innovations had experienced auditors located close to most restaurants, Hard Rock achieved that goal. It also saw an improvement in compliance and control “because we had objective third parties auditing each operation,” DiPerna says.

One of the most impressive improvements was seen in merchandise shrinkage. “It wasn’t that we had a big problem before, but having an outsider with experience in this field examine our operations allowed us to see a significant reduction,” DiPerna says.

Among the things LP Innovations is examining at the retail operations are personnel compliance, quality of guest services, cash management policies, physical security compliance and inventory control. The restaurant operations are examined for compliance with food handling and sanitation policies.

The first year working with LP Innovations “was a real learning experience,” DiPerna says. “They were able to find problem areas that we had not identified before. The level of compliance to our rules has improved dramatically since we brought in outside auditors.”

LP Innovations conducts twice-yearly, two-day audits of Hard Rock’s North America operations. Audits must be at least four months apart, and operations management is not given advance notice as to when they will occur, though Hard Rock provides a list of blackout dates that includes holidays and days when operations management is on vacation.

Looking at both sides
LP Innovations was able to adapt an auditing program that was specific to the needs of Hard Rock. “We have never had a manager call and complain that the auditor was not reasonable,” DiPerna says.

At Hard Rock, the challenge was to come up with audits that considered both sides of the operation. “Hard Rock has a unique culture,” says LP Innovations president Steven May. “It wants to give its customers a unique experience so that going there is more of an event. We had to come up with an audit program that reflected that unique culture.”

LP Innovations’ auditors bring a depth and breadth of outside experience not always available in-house, May says. “When you have internal auditors, you are limited by what they know about that business,” he says.

“Our auditors are able to leverage experience they bring from other retailers; we don’t have to re-invent the wheel each time. It is likely that this is an issue another one of our other clients already faced and we already know the best-practice solutions to deal with the problem.”

A common issue many retailers are facing today is preventing fraud associated with gift cards. “We’ve surveyed enough retailers to see how they are handling gift cards and what procedures need to be in place,” May says. “We know what compliance concerns and procedures need to be added to retail operations.”

LP Innovations also provides a service whereby Hard Rock employees can report allegations of illegal or unethical behavior via e-mail or a toll-free phone call. In cases where cash or expensive items were missing, investigators came in to question staff. “Sometimes, they have determined the controls were not in place [to prevent theft from occurring],” DiPerna says. “They are also extremely professional in talking to employees and getting them to cooperate. They are able to get at the truth of what happened.”