“A man with money met a man with experience – the man with the experience ended up with

the money, the man with the money ended up with the experience”. – Anonymous
The above is a quote which I have embraced as my standard working guide ever since I came
across it in one of the many books/articles on Internal Auditing. I find that it has a dual meaning and
purpose at least in my specific case. It firstly encapsulates the essence and raison d’être of what I do
– Internal Audit and secondly it describes as the Italians would aptly say…’a pennello’ what the
hospitality business is all about.

Let us face it, although the hospitality sector in Malta is undoubtedly one of the pillars of the
economy it is also an industry where competition is particularly intense and keeping up with the
Joneses is not a simple euphemism… all this in a never-ending bid to attract clients with
money… mind you… globally it is not much better.
Symptomatic of the hospitality environment are words such as luxury, good food and all year
entertainment. Whilst however, this may well be the all end game, the reality behind these trademark
connotations are endless hours of hard work and increasing operational and financial risks.

What Makes A Hotel Or A Restaurant A Grade Above The

Rest?
Is it the quality of food, location, service, room or restaurant décor, staff hospitality or efficiency in
dealing with clients’ requirements/complaints whether the latter are on holiday or business? Or is it
the overall good experience that the client takes with him/her?

This drives me once again to my guiding quote where the fine balance between a positive or
negative experience can be expressed as the correlation between the money paid and the
perceived experience that one expects to receive.
Among the major reasons why hospitality companies are being exposed to high levels of risk and
possibly fraud is that the industry’s culture frequently emphasises customer service over internal
controls.

Hotel or restaurant managers naturally want to spend most of their time meeting and greeting guests
rather than authorising purchases, guest refund requests, monitoring check-ins, approving
complimentaries, monitoring energy usage or marketing costs, scrutinising payroll costs and the
efficient deployment of employees, etc.,

Line employees, supervisors, managers and senior executives are often so narrowly focused and
ingrained on getting repeat clients that financial and operational controls inevitably go down the
pecking order.

In such an environment, what is the real role of the Internal Auditor – Is it one which should be
inward looking and focused solely on the internal environment with emphasis on internal controls
and maximisation of returns or should it be outward looking ensuring that the client receives a
positive experience through established internal practices that focus on maximising the client
experience?

A Balanced Mix Of Both

While customer service is indeed the ultimate factor determining if a hospitality property sinks or
swims, neglecting anti-fraud controls is bound to shrink the bottom line… no matter how wonderful
guests think their visits are.
The challenge to achieve a balance between the quest for premium customer service and the
unavoidable necessity to keep hard-earned revenues from flowing out through exploitation of
inadequate internal controls and the loss of potential opportunity for growth is sometimes draconian.

The Biggest Challenge – Growth!

Globally but particularly in Malta hospitality is an industry experiencing both great success and at the
same time undergoing tremendous transformation. However, differences in purposes and markets,
integrated IT systems and continuously emerging technologies, loyalty programs, challenges
associated with increasing concerns over cyber security, terrorism, employment of foreign casual
workers, the environment, socio economic concerns, etc., are just a few of the real risks to this
industry.

Acquisitive behaviour is driving the need for more shared services and greater integration across
systems. Expansion to global markets, demands new ways of approaching operations to address
differences in the level and types of products and services.

While this growth is positive, it drives important changes for the way internal audit is conducted. The
internal auditor must shift the operational focus, devise and leverage new controls with finite
resources and manage risk across a greater number of properties and operators.

By looking beyond processes and controls, the internal auditor can with the holistic knowledge which
is garnered through indirect involvement in day to day operational issues [through fieldwork reviews]
and direct interaction with management, audit committees and boards play an essential advisory role
within the hospitality sector. It can identify enterprise-wide cost efficiencies, provide strategic insights
that improve business performance and provide key insights that focus on the risks that matter. This
kind of support reaps multiple benefits for the organisation, including enhanced efficiency, and the
ability to move more quickly and to take advantage of opportunities.

Technology Is Transforming The Industry On Both Sides Of

The Equation
Technology is rapidly changing the way business is analysed and conducted. Integration of systems
is critical with data which is available in one place, an advantage at all levels, including increased
reliance on cloud technologies to merge and streamline reservation systems and other core back-
end functions.

Technology is also changing the face of the customer experience and of loyalty programmes.
Customers increasingly want more for less and they want it faster – booking.com, Expedia, trivago,
etc., are just to mention a few of the game changers. Opportunities abound for the customer to
explore what is available and to compare and evaluate not only what is on offer locally but also
beyond our shores. These opportunities require new methods not only for securing transactions but
also for tracking and assessing them.

Information Is Critical
The amount of information available is both critical and dangerous with the not so remote possibility
of easily losing focus in the ever increasing quagmire of data at the disposal of management. The
internal auditor needs data to assess ROI, identify patterns and trends around fraud and help the
business react to and predict performance – those in the industry would immediately acknowledge
that knowing your RGI, MPI, ARI, RevPar, ARR, RevPAC 1, cost-of-sales, stock turnover, average
spent per guest etc., are all essential benchmarks.
Analytics play an increasing role in mitigating risk, particularly around loyalty programs. If one has
smart systems in place, one can continue to transform processes to manage these risks. It takes a
broad IT effort, significant investment and a deep understanding of the business process to achieve
this. At the same time this transformation is calling for a natural transformation of the internal auditor.

What Is Needed From The Internal Auditor To Realise This

Transformation?
The days when the primary focus was on compliance is over and has opened an incredible
opportunity and responsibility for the internal auditor to become a critical partner to the industry,
helping operators in the market understand if they are going about addressing the changes they face
in the right way. This means not only assessing the effectiveness of control and risk mitigation of
revenue leakages at the point of sale (POS) or analysing the efficiency and consistent standard of
service of outsourcing arrangements (casual/contracted local/foreign employees – have become a
common occurrence in Malta) but also participating proactively in the design of new plans and
programs.

The internal auditor can provide a measure of reassurance to internal and external stakeholders that
internal control frameworks are adequately designed and operating effectively by:

 Aligning itself with the organisation’s key business objectives;

 Improving audit efficiency and effectiveness, and streamlining processes to drive cost
savings;
 Offering broader risk coverage and be proactive about current and emerging risks;
 Enabling cost efficiencies across all functional areas;
 Identifying and employing the right internal and external skills; and
 Creating competitive advantage by contributing to sustainable business improvements.

What Are The Pitfalls?

Diversity – The diversity of the complex issues in the hospitality industry right from rate contracting to
pricing strategies, market penetration, engineering, marketing, service delivery, security, IT
knowledge, etc., are taxing on the internal auditor who is required to keep abreast of the ever-
changing developments in these areas if he wants to add value to the organisation.

IT complexity – The complexity of the information systems with different systems used for various
processes/departments such as Opera for PMS, Micros for Food & Beverage, Materials Control
(MC) for stores/purchasing, SUN or SAP for financials, etc., In the absence of one Enterprise
Resource Planning (ERP) platform, auditing various systems can be complex.

Risk profiling – The uncertainties of risk profiling due to the unpredictability of the industry
performance increases the difficulty to plan what risks to audit around with completely new risks
emerging which can be far from home than one could imagine.

What Are The Opportunities?

One expects that the hospitality industry will continue to transform itself at incredible speed, in both
predictable and unexpected ways, well in the future. The internal auditor has an opportunity to
exploit this moment and serve as a dynamic partner to the business. He/she is at a vantage point to
act as a strong ally who is already well equipped to support and contribute to innovation and change.
It is vital that the internal auditor provides assurance over systems and controls and gives guidance
that is both commercial and adds value. Whilst ways to save costs or increase income and meet
regulatory and governance needs is a sine-qua-non, one cannot ignore the fact that especially in the
hospitality sector the client is the one with the money and the one who ends up with the experience.