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July 31, 2001 21:50:18
Fraud in the Dealership

Don E. Ray
George B. Jones Companies

Fraud accusations and car dealerships seem to be in the news all the time these days. Various state Attorney Generals seem to constantly put dealership actions in the "fraud" category. I, for one, am getting a little tired of constantly hearing about alleged dealership consumer fraud. I see much more dealership employee fraud. In thinking about dealership employee fraud, a meeting early in my accounting career comes to mind. Mr. George Jones (the founder of our CPA firm) called me into his office to talk. One of the things he asked me was "Donnie, what kind of person will steal from you?" Of course I had no idea of how to answer such a question. After getting no response of any substance from me, Mr. Jones continued. "The only kind of person who will steal from you is the kind you trust because you will not give anyone else the opportunity." Ah, my first exposure to a leg of the fraud triangle and the only leg that is controllable to some extent by the dealer. If any one of the three legs of the triangle is taken away, the chance of fraud is significantly reduced. Lets consider the legs of the fraud triangle.

Pressure. Most people did not go to work at a dealership with the intention of stealing. However a financial pressure or problem may arise from anything from a divorce to gambling or drug debts to medical or college bills to the desire for a new sports car or boat or home.

Rationalization. Rationalization is a crucial component of most frauds. Most people have a need to reconcile their behavior with commonly accepted notions of morality, decency and trust. A common rationalization is "I didn't really steal. I just took what was owed to me because I am underpaid."

Opportunity. Poor internal controls and other sloppy practices increase the opportunity for fraud enormously. The opportunity to commit and conceal the fraud is the only element over which the dealership has significant control.

Generally when fraud exists in a dealership, "red flags" are flying around waiting to be seen or acted upon. Some of the red flags you should watch for include:

  • Sloppy books
  • Floating adjustments
  • Unexplained shortages/questions
  • No vacations
  • Friends or family on payroll
  • Behavioral changes (drug, alcohol, or gambling problem)
  • Excessive number of bank checking accounts
  • Unexpected overdrafts or declines in cash balance
  • Use of unnumbered documents
  • Over-aged inventories, receivables or contracts in transit
  • Lack of segregation of duties
  • Lifestyle changes (cars, jewelry, homes, clothes)
  • Significant personal debt and credit problems
  • Reluctance to provide information to auditors
  • Excessive number of 13th month adjustments
  • Excessive number of CPA adjustments
  • Any financial transaction that doesn't make sense
  • High employee turnover
  • Missing records

Studies of fraud cases have consistently shown that red flags were present, but were either not recognized or were recognized but not acted upon by anyone. Once a red flag has been noted, dealership management should take action to investigate the situation to determine if, in fact, a fraud has been committed.

In addition to a strong system of internal controls, here are some cultural policies that may minimize occurrences of fraud.

  • Clean up your own act. Employees can easily rationalize fraud if the behavior of the dealer or top management is perceived as unethical
  • Be inquisitive
  • Hire the best people
  • Consistently follow the dealership's employment process
  • Always check references
  • Drug test before and during employment
  • Administer pre-employment profile tests
  • Know your employees
  • Communicate non-tolerance to fraud
  • Take full legal action upon detection of fraud
  • Establish a fraud policy in your employee handbook
  • Reward those who report theft and pay upon conviction

Dealers often ask "What are some specific action steps that I can take to reduce the likelihood of undetected major fraud from occurring in my dealership?" To that end we recommend that the dealer or other responsible management consider the following:

  • Review the missing document reports
  • Ensure adequate segregation of duties
  • Have the dealer open the mail
  • Have bank statements sent directly to the dealer's home
  • Control mailing of statements and checks
  • Maintain strict accountability for all cash funds
  • Demand prompt account reconciliation and analysis
  • Ask employees "Do you know of, or suspect any fraud in this dealership?"
  • Subscribe to an employee hotline
  • Review open the repair orders report
  • Review the report of parts on open tickets
  • Take and reconcile physical parts inventories at least annually
  • Review vehicle gross exception reports
  • Review activity with wholesalers
  • Review closed deals not updated into accounting
  • Review monthly parts management reports
  • Ensure federal cash reporting compliance- Form 8300
  • Consider the use of the GBJ eBarometer, an exception reporting tool

All dealers will experience fraud at some time or another, but hopefully by following some of the ideas offered here, the loss can be minimal and quickly discovered. Now if we could only get those Attorney Generals to investigate employee fraud as vigorously as they do alleged dealer fraud.

Don E. Ray, CPA, DABFA, Co-managing Principal, George B. Jones and Company, P.C.





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