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Restaurant chain shareholder suspected of fraud

--Investigation findings force co-owner to sell his stake


A co-managing shareholder of an upscale California restaurant chain retained Aho & Associates to investigate whether another co-managing shareholder was misappropriating assets of the business.  Our client—Shareholder #1—was concerned that Shareholder #2 had taken disbursements, salary, and reimbursed expenses in excess of what he was allowed by the shareholder agreement.  Because the chain was structured as series of limited liability corporations with each owning a number of restaurants, the financial records for the restaurants were largely unconsolidated.  We were consequently tasked with conducting examinations of eight years of transactions for each restaurant and LLC, along with transactions among the LLCs.


The shareholder who was the subject of our investigation and the CFO of the chain were uncooperative and attempted to stymie our investigation by providing limited and incomplete records.  Nevertheless, we discovered a number of irregularities and weak internal controls from examining the mass of transactional restaurant data, financial source documents, prior financial statements, payroll reports, and sales and income tax returns.


The nineteen entities comprising our client’s business suffered from bookkeeping, accounting, and management issues.  At the outset, we noted that the business did not maintain and report financial information according to generally accepted accounting principles, which is highly unusual for an investor-owned multi-store restaurant operation.  This in turn raised concerns over the accuracy of tax returns, legitimacy of inter-company transactions, and accuracy of account balances.


Our analysis revealed that non-GAAP bookkeeping practices may have been used to hide expenses and incompletely account for cash and other assets.  We discovered that Shareholder #2 took substantial disproportionate shareholder distributions as well as a series of questionable and sizeable reimbursements for his personal airplane maintenance, relocation costs, and personal trips.  The company’s payroll records also suggested that Shareholder #2 may have received excessive salary and benefits payments.


As a result of the findings of our investigation, Shareholder #2 was compelled to sell his interest in the business on terms that fully accounted for his prior actions.  The business also replaced key personnel, tightened its internal controls and overhauled its bookkeeping and accounting processes to conform to GAAP.  

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