Preventing Fraud in Auto Dealerships
To prevent occupational fraud from cutting into your auto dealership’s profits and generating negative publicity, you need a strong internal controls system. And effective controls start with current and accurate financial statements.
It starts in accounting
One sign of weak internal controls is an accounting department that fails to generate a balance sheet and income statement until two or more weeks after month’s end. Accounting should post transactions daily, including new and used vehicle sales, repair orders, invoice payments, payroll and cash receipts.
By 1 p.m. on any given day, you should have access to real-time checkbook balances and other accounting information effective as of 5 p.m. the day before. That way, you might be able to catch the first signs of fraud and use the data to catch the perpetrator.
Tried and true methods
Complex computer passwords, background checks, and security cameras are essential to preventing fraud. But sometimes these protections fall by the wayside. Periodically review your safeguards and ensure they’re being used. For example, require employees to change their passwords quarterly, conduct regular inventory counts, engage outside CPAs to perform audits and segregate accounting duties.
As a rule of thumb, employees who record and reconcile transactions should never have access to those assets (including being a signer on bank accounts). Give the segregation of duties a starring role in your internal controls program.
Real life examples
To see how such controls can reduce losses, consider this real-life scam. A parts manager stole $70,000 by selling his employer’s parts and pocketing the cash. The loss could have been reduced if the owner had performed random inventory counts throughout the year, rather than waiting for his CPA to physically verify inventories at year-end.
In another case, a dealership caught its cashier stealing by voiding service orders and falsifying deposit slips. The cashier’s responsibilities included collecting cash, issuing receipts to customers, preparing the daily deposit slip and reconciling the daily cash report. A loss of $16,000 might have been prevented if the dealership had segregated these duties.
Another dealer learned that his general manager was wholesaling used cars at a loss to the dealership because he owned a 50% interest in the wholesaler. A better pre-employment screening process might have helped detect such conflicts of interest as well as any criminal history.
We can help you bolster your dealership’s internal controls. But your involvement is essential to preventing fraud. Let employees know that you personally review bank statements, order test counts of inventory and examine adjusted journal entries. Knowing that you’re paying attention will discourage most thieves.