Employee Theft In Your Dealership? – It Could Happen To YOU!

Detecting and preventing fraud has become critical with the volume of transactions and automation in automotive dealerships today. While employee theft is, unfortunately, not uncommon in today’s workplaces, and it’s often the employee you least suspect that is the culprit, dealerships are extremely susceptible with the many different departments that comprise most retail automotive dealerships. Not only does the owner need to be concerned with the typical theft from the office, that we often hear so much about, but theft can happen just as easy in the service, parts, body shop or even within the wholesale vehicle purchases and sales area.

As Certified Fraud Examiners (CFEs) that handle many dealerships from small single points to large multi-group franchises, we have a common saying; Trust, but verify. The truth is with so many pressures that people face these days, the only way to really protect yourself and your company is to have controls in place to limit the opportunities for theft to occur.

It was only a few years ago, when we read the article of a Pennsylvania office manager that was able to embezzle TEN MILLION dollars. As you read the article and the way she went about it, most dealers will often say, That couldn’t happen to me! But, as you look around your dealership and examine your employees, do you often find yourself taking short-cuts because of your workload and time constraints you face daily? If the answer is ever, Yes, then you are easily a target of potential fraud. I had worked for a multi-franchise dealership with multiple locations and, as the CFO, developed many internal control procedures. One of the procedures was dual signatures for all disbursements. However, with the owners at a different location and a dealer trade that had to go immediately, that procedure was usually overlooked, and only one signature was on the check.  Once a control that was put into place is allowed to have the rules bent on occasion, then it is usually only a matter of time, before that control goes away.

This article will examine some of the areas in the accounting department that have the potential for fraud and some controls that could be put into place to help lessen the chance of fraud.

One of the very first things an owner or CFO of an automotive dealership should do is to start thinking like a fraudster! You should walk around your dealership and all the departments and ask yourself, If I wanted to steal something, how could I go about it? How can I take something, either money, parts or even service work, and no one would suspect? Once you get into that mindset, you may be amazed at the areas that are challenging to control.

As discussed above, the office has many areas that are susceptible to fraud. The office has control of usually millions of dollars a day, in terms of CMA accounts, credit cards and, of course, actual cash. The office is also typically responsible for handling all petty cash transactions and the processing of payroll. All of these areas not only allow a fraudster to embezzle funds, but by nature of the amount of transactions, allows the office personnel to easily cover up those funds. The easiest way for a fraudster is actual cash. The dealership receives thousands of dollars daily in cash from service department sales and customer cash deposits. How easy would it be for someone to take $100 from the drawer and conceal it? Unfortunately, for the owner, the answer is very easy! Unless the office has great internal controls in place with the proper segregation of duties, an office employee could steal thousands of dollars a week, and it could take months, if not years, to uncover it. Luckily, or not for the owner, most fraudsters will not stop at just a few thousand dollars. They may start small but once they realize they can get away with it and how easy it appears to be, they usually end up greedy and will take significantly more money that will ultimately end up in them being found out.

So what are some ways the office personnel could take cash without anyone realizing? Some of the easiest ways are to manipulate the cash receipt. A customer gives a salesman $500 deposit, and a receipt is printed by the office clerk; however, the office clerk goes back into the computer system and adjusts the cash receipt to $400. If this clerk has responsibility to record the sale in the computer system, they would just adjust the cash on delivery amount to $400 and would change another amount to make the entry work. Another area would be to post the $500 cash deposit (this would create a $100 shortage on the customer deposit schedule) and then perform a schedule clean-up and offset that $100 against older customer deposits that were never refunded. The dealership usually has many customer deposits for $20 or more that the customer put down on a deal and then never purchased a car, or has requested a refund on, that could be used to offset the missing $100.

An additional area that most dealers would never investigate is to change the amount of sales tax payable on the deal in the computer system. If the sales tax collected on the bill of sale was $2,000, the clerk would just change that amount to $1,900, and the $100 that was embezzled has been covered up, and it hasn’t even affected gross profit or any other car schedules that are reviewed. When is the last time you have reviewed the general ledger detail for sales tax payable? Have you performed analytical procedures to see if the amount due is accurate? Have you spot-checked deals to the actual amount posted in the general ledger? In my twenty years, I have yet to come across a dealer that looks at that account. For busier dealerships, there is usually hundreds of thousands of dollars going into that liability account. Unless you have a sales tax audit, the chances of this discrepancy being caught would be rare. It is easily justified by the fraudster, as well, as the only one really hurt by this is not the dealership, but only the sales tax authority.

Another big area is checks. About 75 percent of frauds are related to checks. This is where the office personnel write checks to themselves or someone they know. This is an area that can easily be monitored. The owner should be reviewing online bank activity and also reviewing the check images online to determine these payees are appropriate. If the owner doesn’t have time to click on each check image, a great control is to randomly print three or four cancelled checks and give them to the office manager to pull the support for you. Since the office manager knows you are reviewing cancelled checks, even though they have no idea you are not looking at them all, will significantly deter them from writing a check, at least made payable to themselves. A growing area of concern is company credit cards. Now with more and more use of credit cards to pay accounts payable, DMV, duplicate titles, etc., the company credit card has become increasingly vulnerable. A great internal control procedure is reviewing the credit card statements. As an owner, you want to have the same control in place you have with checks. You should review the credit card statement, and request a few items to have back-up to the charges. You should be focusing in on common charges that both a business and a company would have. Would you as the owner question a charge for Verizon. If that was the wireless carrier you used in the dealership, you probably wouldn’t give it much thought. However, if an office personnel member also had Verizon as their wireless carrier, how do you know if this was for the business account or the office personnel’s own account? Requesting support for those common expenses, even if you only do it randomly, would make a person stop and think that you may catch them. Most fraudsters are not looking to get caught, so if they know you are looking at certain items, they will use another means or account to try to conceal or embezzle the money.

Further, we have seen fraud on the rise in accordance with the use of petty cash. Typically, most dealerships do not have large amounts of cash in the petty cash drawer, and most dealerships have procedures in place; this is usually not monitored as often as it needs to be. It is easy to change a receipt for cash paid to a dealer trade driver from $70 to $90, and who would know? What if the petty cash drawer is short? At what point does the office manager notify the owner or do they just post the difference to miscellaneous expense? Does the office manager buy lunch for the office daily with petty cash, and the owner is unaware of this? A good procedure is to review all petty cash receipts to the replenishment check that is being written and also an occasional surprise petty cash count.

Performing a yearly review of the procedures and testing the internal controls should be performed to make sure the procedures are being followed. Many companies set good procedures, but as time goes on, the procedures are usually never maintained. Having a CPA firm that has experience in these areas perform a yearly update and review will help put the owner’s mind at ease.

Sean T. Daughton, CPA, CFE is an audit partner with over 20 years of experience providing audit and consulting services to a variety of clients, including automotive dealers. Sean spent several years as a CFO for a multi-franchise automotive group prior to joining Dannible & McKee. Sean provides the Firm’s automotive clients expert consulting on accounting systems, department profitability and fraud.