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Internal controls are vital in guarding against fraud

By Erica Tang, Audit Manager

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.

 

Keep timely financial information

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, have bank statements sent to the owner’s home instead of to the dealership.

 

Installing other internal controls

Here are additional internal controls that can help your dealership mitigate fraud and embezzlement.

 

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 locations, have controllers from different sites 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. Your LGT advisor can help your dealership by performing an internal controls assessment and providing industry best practices.

 

50 ways to steal from the 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 embezzlement schemes are:

  1. Stealing body shop and service department supplies to use for off-site repairs or sell for cash
  2. Inserting fictitious journal entries into dealership records
  3. Granting business to favored suppliers in exchange for kickbacks
  4. Not recording repair orders or other sales and pocketing the cash
  5. 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 LGT advisor for help developing controls.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt LLC, call (214) 871-7500 or email askus@lgt-cpa.com.