Suspicious Businesswoman Peering Through Blinds

Most victims of employee theft set themselves up with lax financial and operational protocols. Protect your business with practices that keep honest people honest and fraudsters at bay.

Reducing risk

Top 10 Best Practices for Preventing Internal Fraud in Dealerships

  • 1/6/2016

Dealers who become victims of employee fraud tend to place unrestricted trust in those they shouldn’t, including the credentialed controller or high-performing sales manager they hired to help run their dealerships. In their belief in common decency, they fail to remove all temptation from their financial and operational protocols. This makes it just a little too easy and all too irresistible for less honest employees to rob them from right under their noses.

As a dealership consultant, I’ve had clients and known non-client dealers who’ve been victims of internal fraud, and it occurs more frequently than you might imagine. Though the patterns of theft and the results were all different, these victims shared four distinct preventive shortcomings:

  • They were caught off guard.
  • They were part-time or absentee owners who trusted their fraudulent employees completely.
  • They either did not have internal controls in place at all or those they did were not regularly followed.
  • The perpetrator was caught by chance, not through systematic fraud controls.

I’m not suggesting that you place suspicion on each of your dealership’s employees or categorically regard trustworthy people as crooks. But unless you recognize that internal theft is a risk inherent in every business and take measures to keep it from happening to you, you leave yourself unnecessarily vulnerable. Establishing strict protocols isn’t punitive; in fact, it helps honest, hardworking employees do their jobs even better.

Over the years, I’ve found that these 10 best practices are the most effective at preventing and unearthing employee fraud:

1. Segregation of all accounting duties — but with shared knowledge of them

It’s unwise to give one individual control of all functions in the finance department. There should be clear and distinct separations of assignments for accounts payable and receivable, cash and bank reconciliations, receivables write-offs, customer credit card refunds, and titling, among others. These lines of separation are hurdles to fraud, encumbering a perpetrator’s route to theft.

Once you have cordoned off these various internal functions, you should make sure that all finance personnel are cross-trained in each of them, including (and especially) those that fall in the controller’s realm. Hoarding knowledge can cloak a fraudster’s misdeeds.

2. Monthly cash reconciliation to the penny

Train multiple people in your finance department to perform this essential chore. It is a good idea to change up the individual who performs this task from time to time.

3. Mandatory controller vacation

When finance personnel are cross-trained and can cover for the controller when he or she is away, you should require the controller’s absence on an annual basis. Mandatory vacation means several consecutive days out of the office so that other staff have to get their hands and eyes on the controller’s business — feel and see his or her world. This can serve to keep him or her honest or root out any fraud, should it be there.

4. Mail control

As the dealer-owner, it’s smart to personally open all invoices and payments that are sent to your business. These should never be delivered directly to the AR and AP departments still sealed up. If this duty is parceled out to another employee you consider trustworthy, you can test your instincts by mailing yourself $100 cash (with a disguised return address). If the cash doesn’t end up on your desk, it’s a safe bet a sticky-fingered employee is in your midst.

5. Annual vendor audit

Savvy internal thieves often create sham vendors who bill for small amounts, effectively paying themselves significant figures over several years’ time. Every single year, pull a list of all your dealership’s vendors and corroborate each one’s corporate name, dba, physical address (post office box is insufficient), owner’s name, and phone number — then call that number and speak with a live person to verify the vendor’s authenticity. You should also review the contract terms and pricing and make sure they align with the payment history.

6. Journal entry and general ledger reclassification reviews

Fraudsters are wily, agile people. An eagle-eyed review of the journal and general ledger can detect some of their financial acrobatics, like a controller cutting herself a check but reclassifying it to another account. Or she could charge up a big employee receivable and then move it to customer receivables and write it off as aged. Scour the books for these kinds of tricky maneuvers.

7. CPA spot checks

Bring in hired guns on occasion. Dealers are wise to engage a certified public accountant to drop in with a day’s notice (or no notice at all) to inspect the books onsite. The inspection itself will be valuable, but you can also monitor your controller’s reaction to the announcement and behavior during this event. Panic is a tell-tale sign of wrongdoing. Composure and confidence are reassuring.

8. Parts department controls

Fraud isn’t limited to the pilfering of cash. Unscrupulous employees can steal equipment from a dealer as well, of course, but they can also compromise the business’s best interests for personal gain. Schmoozy vendors tempt bad behavior with kickbacks and perks, rewarding certain purchase thresholds with trips, game tickets, big-screen TVs, you name it. So a dealership that only needs to hold 100 tires in inventory, for instance, may find itself with several hundred more on hand because the purchasing manager over-bought to get that personal kickback.

You can prevent equipment theft and kickbacks at your dealership with a few internal controls. Monitor purchasing behavior and look for excesses and imbalances in vendor patterns. Inventories of physical parts are best managed by an outside party that supervises internal staff in the process. Parts rooms should be locked and accessed in pairs with strict, written check-out protocols.

9. Used and rental/loaner vehicle controls

There is plenty of opportunity for fraud in the movement of a dealership’s used vehicles and rental or loaner cars if it isn’t watched closely. A good practice is regular spot checks of the vehicles themselves and their management protocols. As the dealer-owner, you should physically see and touch used cars to be sure they are actually on the lot and not already sold, for sale somewhere else, or altogether fictitious. The same goes for rentals and loaners, which can disappear without proper, enforced agreements.

Sales managers can be lured into fraudulent behavior just as easily as controllers and purchasers or parts-room employees. Dealers are wise to avoid used-car wholesalers that peddle their wares with personal kickbacks and rewards to managers, who may sell vehicles for less than market value to chock up more perks. Ditto for certain auction transactions. Spot-check prices paid for auction and wholesale vehicles, and spot-check the appraisals of customer trade-in vehicles to make sure your customers are getting fair market value.

10. Welcome and encourage whistleblowers

Employees who suspect or witness fraud often keep their suspicions or knowledge to themselves because they are timid or fear retribution. You can assure their confidentiality — and show you are serious about preventing and prosecuting fraud — by establishing and posting anonymous fraud-tip hotlines. Set up a confidential 800 number and post it in internal-only areas of the dealership.

These 10 practices can help you think like a perpetrator and put yourself into a more defensive frame of mind. When these controls are established, communicated, and adhered to, fraud can decline considerably. As a trusting business owner, it can be difficult to enforce such wary measures, but the value of these controls can’t be overstated. When you understand and practice the power of prevention, you may not have to suffer losses, prosecute employees, and incur other reactive costs of fraud.

How we can help

CLA’s dealerships industry practitioners and consultants can evaluate your financial and operational protocols and help you minimize your vulnerability to fraud. We can also help you engage and strengthen your team with leading-edge hiring, training, and retention strategies.