With the economic recession and the struggles in the auto industry, the motivation and the opportunity for theft and fraud have increased. The cash-heavy nature of their operations makes dealerships susceptible to fraud and theft, and sometimes the most trusted managers can be the perpetrators.
The perfect storm of economic events has frightened many people. Layoffs and reductions in compensation, coupled with personal trials at home such as loss of a second income or mounting debt, can lead desperate employees to commit theft. For those with the opportunity, and mounting motivation, the dealership represents an enticing opportunity.
According to the Association of Certified Fraud Examiners in its 2008 Report to the Nation on Occupational Fraud and Abuse, approximately one-third of the reported incidents of fraud in the United States involve two or more people working in collusion, and the median loss is four times greater than when a single perpetrator is involved. Accounting department employees, who have easy access to company assets and the most opportunity to cover up their fraudulent activities – commit the highest percentage of fraud. Executives and upper management commit the second- highest percentage.
Unfortunately, it’s likely in your dealership that staff reductions have eliminated or reduced the appropriate segregation of duties, which is the dissemination of tasks among multiple employees to provide checks and balances. The segregation of duties is the foundation of a strong system of internal controls.
Although your managers might be long-time and trusted employees, changed personal circumstances could drive them to act in ways you wouldn’t anticipate. Every dealer needs to have an appropriate level of skepticism about what employees, especially those with access to the accounting system, are doing.
Key Accounting Control Areas
Most dealerships have in place accounting internal controls designed to prevent or detect fraud. However, if the controls are not designed properly or do not operate as intended, a dealership’s exposure could be significant. Now is a good time to review your dealership’s internal controls and make sure they are operating properly. Following are some of the many accounting control areas which should be examined and analyzed to help ensure that your controls are effective:
- General Journal Entries
- Cash Receipts
- Parts Inventory
- Cash Disbursements
Beyond an Accounting Issue
In today’s economic environment, every dealership is at risk of, or has already experienced, employee theft or fraud. Especially now, every dealership needs to have a systematic approach in place for analyzing the organization’s internal controls and a plan for testing the controls are working effectively.
Testing and implementing internal controls is challenging, particularly when a dealership has cut its resources, and having strong internal controls which are operating effectively may seem like an “accounting issue.” However, lacking such controls can have a significant negative impact on your bottom line. It’s time to revisit your controls and tighten the reins on your accounting processes so you keep the dollars you earn.