Internal Controls

Here it comes… a doomsday warning about theft and internal controls. Why does it seem like accountants love firing off warning flares about fraud? Do we really love standard procedures? Is it because we’ve seen the statistics? Are we just trying to sell services? No. It’s because too many times we’ve received the call from a client saying they’ve just discovered fraud at their dealership. How did this happen? Where else am I vulnerable to theft? I thought I could trust my employees!  While no level of internal control or a year-end audit can completely eliminate risk of loss, we are eager to raise awareness regarding the areas which are most susceptible to theft and fraud in the dealership environment and ways that those risks can be mitigated.

You don’t have to work in this industry long to see examples of employee fraud; it happens far too frequently. The types of schemes seem endless, and quite often the perpetrator is a long-time and trusted employee.

- Recently, DealersEdge reported a case in which an office manager stole $700,000 over five years. It wasn’t complicated; she had access to make online payments from the dealership’s bank account without additional approvals and used those to make multiple payments on her personal credit cards and car. She also had access to the payroll system and cut almost 100 unauthorized paychecks to herself. She was a trusted employee who had been given “the keys to the kingdom”. She controlled the store’s accounts payable and accounts receivable schedules, made bank deposits, reconciled the accounts, and accordingly was able to manipulate the dealership's accounting records and financial statements. Does anyone in your accounting office have this type of broad access?

- Let’s talk payroll next. In another recent case, an employee was charged after it was determined she had changed payroll withholdings in the computer system so that she was not paying her health insurance contributions. (via PostStar.com). Are there other ways cash could be stolen through your payroll system?

- Cash, of course, isn’t the only asset at risk. What about parts inventories and the ability for manipulation in that area? A dealer recently discovered that his Parts Manager had sold parts and merchandise at personal gain, which were purchased by the dealership. This scheme went undetected for almost two years. He sold the parts to acquaintances, put some on his personal vehicles, and sold others through an online auction site to buyers as far away as California and Holland. Because of his position, he was able to bypass normal purchasing protocols to cover up the scheme. (via wctv.tv). Do all parts purchases in your dealership require approval?

Now for some good news, not every situation results in significant loss. Recently, a dealer discovered fraud in its early stages through an employee whistleblower. This dealership created an environment where employees were encouraged to elevate concerns when an issue “didn’t feel right”, and it resulted in the quick identification and handling of fraudulent employee actions.

The battle against fraud must be an ongoing effort and fought on multiple fronts: preventive controls, detective controls, management tone and follow-through. What can you do now? Acknowledge that the threat is real and ever-present, invest time in risk assessment, check your current controls with regularity, be unpredictable, and you will be moving down the path to protecting your brand and your future earnings.  

To learn more about internal controls or how to prevent fraud in your dealership, please contact your dealership CPA.  Or, you may contact Lori Haley with the Dixon Hughes Goodman Dealership team at 205.212.5315 or via email at Lori.Haley@dhg.com.

About the Dixon Hughes Goodman Dealer Services Group: The Dealer Services Group of Dixon Hughes Goodman has a team of dedicated professionals working exclusively with dealerships across the country. We represent dealerships in all 50 states, serving dealership groups of all sizes, including half of the top 10 dealership groups in the country. Providing our clients with industry thought leaders in our Assurance, Tax and Risk Service Groups, we consult on best practices to help maximize efficiencies, decrease costs and understand risk management. Dealerships need an independent CPA firm to provide an objective view to take their business to the next level. At Dixon Hughes Goodman, we deliver on both sides of the service equation - a fact you might find a plus.

About Dixon Hughes Goodman LLP: With more than 1,800 people in 12 states, Dixon Hughes Goodman ranks among the nation’s top 20 public accounting firms. Offering comprehensive assurance, tax and advisory services, the firm focuses on major industry lines and serves clients in all 50 states as well as internationally. Visit www.dhg.com for additional information.

ABOUT THE AUTHORS

Tim York
Managing Partner, Performance
Tim.York@dhg.com
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