The Need for Good Controls in Your Dealership

Why is it so important to have good controls in your dealership?

By Randy Domigan, CPA, CFE

$10 million. Gone. And this former controller’s lifestyle showed it. She took an average of $4,000 a day for seven years from a dealership and used it to create a lifestyle of the rich and famous.

Something from the movies? No. It’s a real story about a woman who was trusted and had complete control without oversight. And it cost the dealership $10 million.

Dealership fraud is rampant. It can cost dealers from thousands to millions of dollars, with many instances reaching into six figures. We did an independent market research study with 100 dealership general managers and owners and the results are eye-opening.

More than one-third (38%) of the survey respondents had experienced actual or attempted fraud. More than half (51%) had either experienced fraud themselves or heard about a specific fraud at another dealership. The interesting and unknowable number is how many of the remaining respondents have experienced fraud and just don’t know it yet.

Strikingly, less than a third of respondents to our survey confidently viewed their current controls as strong enough to completely deter or prevent fraud.

The Fraud Triangle

Three factors—sometimes collectively referred to as The Fraud Triangle—are typically present when an employee decides to commit fraud against an employer. These factors are:

  1. Incentive or pressure to commit fraud: This is their Motivation. It could be financial pressures like high medical bills, vices such as drug use, compulsive shopping, extra-marital affairs, and more.
  2. Ability to rationalize or justify the fraud: We refer to this as Justification. Most people are not hardened criminals who could steal from their employers with a clear conscience. They feel justified because they may also be feeling unappreciated, disrespected, have poor relationships with coworkers, or feel as though they are getting paid less than what they’re worth.
  3. Perceived opportunity to get away with fraud: These are your System Weaknesses. Employees will figure out which fraud would be the easiest to pull off and usually those line up with the most common financial system weaknesses at dealerships. An employee makes the final decision to commit fraud only when he or she thinks the potential payoff outweighs the chances of being caught.

Most system weaknesses relate to the failure of the dealership to properly segregate accounting functions that deal with cash, payables, and receivables. They simply don’t know how to set up the proper segregation of duties.

Check tampering is the most prevalent fraud we find, but payroll comes in a close second.

Having a healthy anti-fraud environment with complete buy-in from managers is essential. Create a policy that reminds your staff of criminal prosecution for fraud is also key. Don’t easily say “run that through” to your top managers–it conveys that it’s too easy to get something through.

For full impact and protections, Brady Ware can help you. We pinpoint those weaknesses and test them by reviewing access controls, logins, electronic banking transfer capability, and so much more. We then bolster your systems, so you don’t face massive losses from fraud.

Randy Domigan, CPA, CFE
Director, Certified Fraud Examiner
800.893.4283 ext. 1114

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