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Internal Controls are Vital in Guarding Against Fraud

Many dealerships are riding the wave of an improved economy and the booming automobile industry, which experienced a record sales year in 2015. In the midst of these positive developments, however, there’s one potential risk dealerships should be aware of: internal fraud.

Traditionally, many stores have been susceptible to fraud due to their relatively small financial and accounting staffs, the large sums of cash kept on hand, a high volume of transactions, and their highly marketable inventories. Growing sales and revenue can present even more opportunities for dishonest employees to embezzle funds.

Making financial information timely

One of the best ways to mitigate fraud and embezzlement is to implement a system of strong internal controls. For most dealerships, this starts with making sure that accurate financial information is generated on a timely basis.

All dealership transactions — including vehicle sales, invoice payments, repair orders and cash receipts — should be posted daily by the accounting department. This will make it easier to detect fraudulent activity early and take steps to stop fraud in its tracks before too much damage is done.

Segregating duties

Another crucial internal control is segregating financial and accounting duties among multiple employees. In other words, the same employee shouldn’t make deposits and also reconcile the bank account, or both collect and deposit cash. Without this control, a financial employee could steal cash by voiding vehicle service orders and falsifying deposit slips, for example.

If your accounting staff isn’t large enough to segregate financial tasks, have your CPA firm complete some of these tasks, such as account reconciliation. Also make sure the owner is keeping a close eye on finances by periodically spot-checking the bank statements and other financial records. Even better, send bank statements to the owner’s home instead of to the dealership.

Installing other internal controls

Here are a few more internal controls that can help your dealership mitigate fraud and embezzlement:

Keep an eye on electronic funds transfers (EFTs). Thieves are increasingly using wire transfers and ACH transactions to commit fraud, since EFTs can make it easier to hide their tracks. So review these transactions regularly and make sure all EFTs are supported by an invoice or other supporting vendor documentation.

Review adjusting journal entries. These are used by accounting employees to correct original posts. The general manager or owner should approve and sign off on all adjusting journal entries.
Monitor parts inventory. Conduct periodic random counts of vehicle parts throughout the year, rather than just conducting a year-end parts inventory. Also consider setting up cameras in your parts storage area to make it harder for employees to steal items they can then turn around and sell or use themselves.

Create a formal “approved vendor” list. All dealership vendors, from your paintless dent removal specialist to your wholesaler, should be documented on an official vendor list. Then check all disbursements (both paper checks and EFTs) against this list.

Watch out for payroll fraud. Segregate payroll duties (such as preparation, authorization and disbursement) among multiple employees, and have the controller or general manager review final payroll before it’s disbursed. Also require the payroll clerk to take an annual vacation in which he or she is gone for at least one full payroll cycle.

Kickbacks are another fraud risk that dealerships should be aware of. Here, a used car manager might buy or sell vehicles at a price that’s unfavorable to the dealership and then receive a kickback from the wholesaler. In one instance, a manager was selling used cars wholesale at a loss to the dealership because he was a part owner of the wholesaler!

Testing your controls

Once you have implemented internal controls, it’s important that you test them periodically to make sure they’re working as intended. For example, when reviewing bank statements, trace a few transactions all the way back to their origin, and ask the bank for electronic debit and credit memos. If you own multiple stores, have controllers from different locations test the internal controls of one another’s stores.
Also consider establishing a fraud hotline that employees can use to anonymously report suspicions of fraud. Employee tips are one of the most common ways that fraud schemes are uncovered.

Do it now

Don’t wait until your dealership is victimized to take action. Implement strong internal controls now to help protect against fraud and embezzlement.


50 ways to steal from a dealership

In its Dealership Internal Control Manual, the National Independent Automobile Dealers Association has published a list of what it calls “50 ways to steal from the dealership.” Among these 50 dealership embezzlement schemes are:
• Stealing body shop and service department supplies to use for off-site repairs or sell for cash,
• Inserting fictitious journal entries into dealership records,
• Granting business to favored suppliers in exchange for kickbacks,
• Not recording repair orders or other sales and pocketing the cash, and
• Paying fake (self-prepared) invoices with dealership funds and pocketing the money.

Implementing sound internal controls is the best protection against these and other fraud schemes. Ask your CPA for help developing controls, if you need assistance.© 2016