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To catch a thief: How dealer-owners can curtail employee theft

January 21, 2014

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You’ve probably already been the victim of employee theft or dishonesty without knowing it. If strong internal controls aren’t in place, many employee indiscretions are too well hidden to attract attention.

An out-of-control controller

Consider the former controller who was convicted of embezzling more than $10 million from a Pennsylvania dealership in 2012. The controller made about 800 wire transfers from the dealership’s online payroll account to her personal account.

She covered up her fraud by falsifying bank and inventory records. One trick was to put sold vehicles back into the dealership’s inventory system to cover revenue shortfalls.

How did a scam this big go unnoticed for seven years? First, the dealership gave the controller sole control over financial and accounting duties. Second, the owner overlooked an important red flag: the controller’s personal spending habits.

Her annual salary was $53,000. But she was making extravagant purchases, including private jet charters and VIP seating for mass with the Pope.

The dealership expects to recoup about $1 million — or just 10 cents on the dollar — from the former controller, according to the U.S. Attorney’s Office in Pittsburgh. That’s a high price to pay for an important lesson.

Risky business

Dealerships are susceptible to embezzlement because of the high volume of transactions, heavy flow of inventories and sophisticated computer systems. Moreover, dealerships are a combination of several mini-businesses — new and used vehicle sales, parts, service, and finance and insurance (F&I) operations — with different business models and fraud risks.

Small dealers are especially vulnerable, because they have fewer employees, many of whom often perform multiple functions. This makes it harder to segregate duties, mandate vacations and rotate tasks. Too often, thieves turn out to be trusted employees, friends or even family members.

Your own mini-audit

Would-be thieves are less likely to act if they think someone is looking over their shoulders. So, conduct your own “mini-audit” to unearth fraud warning signs. For example, visit the:

Business office. Request copies of reconciled bank statements and verify that they’ve been reconciled and there are no old outstanding items on the reconciliation. Confirm that the bank balance on the reconciliation agrees with the bank statement balance.

Showroom. Compare computerized inventory ledgers to what’s on the floor and backlot. All VINs should match up. Red flags include missing vehicles, unauthorized spot deliveries and posting delays for sold vehicles.

F&I department. Check recent deals to ensure that down payments and funds due at lease inception have been receipted and sent to the business office for immediate deposit.

Parts and accessories stockroom. Randomly count bins and compare to your computerized inventory ledger. Look at the last 10 shipments and compare the invoice to recent journal entries to verify proper recording.

Service bay. Run an open repair order report. All vehicles on the report should be currently assigned to a mechanic or in the queue — or completed and pending payment. Also look for vehicles being serviced that aren’t on your report — it may signal work done under the table.

A proactive approach
Don’t wait for a big employee-driven scam to disrupt your business. If a mini-audit reveals irregularities or errors, a forensic accountant can help advise you on an appropriate course of action.
For more information on this topic, please contact Frank Panzeca at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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