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Dealer Insights - July/August 2013 - Employee Fraud: How To Prevent The “Inside Job”

Alarming accounts of employee fraud at auto dealerships are, unfortunately, not unusual. Take this case from just this past January: A 58-year-old Iowa man and former dealership office manager was ordered to pay back more than $1.4 million he had embezzled from his employer over a 14-year period. He was sentenced to 41 months in federal prison. As office manager, the man had been able to manipulate the dealership’s accounting system, causing money to be wired or deposited in his personal bank account.

Crimes such as this one don’t have to happen at your dealership. Aligning financial transactions with strong internal controls will generally thwart employee fraud. Here are some measures you can put in place to prevent the “inside job.”

AVOID ONE-PERSON DUTIES 

For any employee position, be sure to separate the duties of authorization, custody and recordkeeping. Ideally, different people should perform each of these functions. In no case should any one person be responsible for all three.

Restrict access to cash to as few people as possible. In the case of cash register drawers, ask your cashiers to count the money before and after their shifts. Clarify that, during the time in between, this money is their sole responsibility — no one else should have access to it. When it’s time to deposit the cash, require that two people perform this task.

Review the procedures in your accounting department for dealing with receivables. Make sure no one person can approve the sale, post it and apply the cash. Being able to do so would provide a thief with the opportunity to create fictitious receivables, apply the payment and pocket the money.

For payables, no single person should be able to set up a vendor, post invoices, and then cut, sign and mail the checks. Again, this situation could let a thief set up fictitious vendors and then post and pay fictitious invoices — ultimately to him- or herself or to a co-conspirator. Also establish a strict approval process for new vendors and allow only a few select employees to see vendor files.

LIMIT ACCESS 

In your parts department, limit access to the inventory system — especially in terms of receipts, sales and adjustments. If proper controls are in place, a periodic test count of parts will reveal discrepancies, as will complete physical inventories.

In the service department, restrict access to override passwords, which will minimize unauthorized discounts to friends and family. Also, regularly monitor open repair orders (ROs) to ensure all open ones are current. Old ROs may indicate service was performed, but was never billed.

USE OTHER SAFEGUARDS 

There are other ways that you, as dealership owner, can discourage theft or dishonesty at all levels. Some of these safeguards involve personnel management.

For example, enforce mandatory vacations of at least one week per year. Doing so allows another worker to perform the job duties of the absent person, possibly uncovering undesirable activity. And periodically rotate the duties of accounting personnel. This can serve the same purpose as requiring vacations.

Also, intermittently review your dealership’s vendor list to see whether mysterious providers have materialized. Have your bank statement delivered, unopened and accompanied by that month’s canceled checks, directly to you for examination.

From time to time, you might even consider taking a day to open the checks that arrive in the mail. Total the incoming amounts and then compare that figure to what’s later deposited.

SET THE TONE AT THE TOP 

In addition to having strong internal controls, you can minimize embezzlement by setting “the tone at the top” — management needs to demonstrate a high level of integrity and communicate their beliefs on embezzlement. Employees also should be trained to recognize embezzlement “red flags.”

Keep an eye, as well, on workers whose standard of living suddenly seems to increase or who openly show they feel underpaid or undervalued. The latter group is often able to rationalize stealing as a way to make up for what they feel you owe them.

CALL IN A PROFESSIONAL 

Be careful, though, of jumping to conclusions about wrongdoing unless you have proof. A forensic accountant or other outside financial professional can examine your books to see whether something seems awry.

Dealer Insights - July/August 2013 Issue 

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