INDUSTRY INSIGHTS | SPRING 2011 EFFECT

Low Cost Ways to Reduce Your Dealership’s Fraud Exposure

by Andrew Zebell

Businesses need to continually reevaluate the structure and effectiveness of their internal controls. Dealerships are especially vulnerable to occupational fraud, because millions of dollars flow through their accounts on a monthly basis. Unlike many other businesses that handle large cash transactions, most dealerships do not have sophisticated internal control systems or internal auditors, because they believe the time and cost to implement them is greater than the benefit. Improper processes, inadequate systems, and a lack of oversight could potentially result in a financial disaster. Let’s examine a hypothetical situation to demonstrate the fraud risks that could be exposed in a dealership.

Assume you are the owner of a General Motors, Ford, and Volvo dealership, each with separate locations but a centralized accounting office. Your controller is extremely hard working, never takes days off, and displays essential skills necessary to maintain the dealership’s financials. The internal controls at your company appear to be average compared to other dealerships. The controller approves payments for incoming invoices, issues electronic funds transfer (EFT) and Automated Clearing House (ACH) transactions, is an authorized check signer, and prepares bank reconciliations.

The controller just purchased a brand new Yukon Denali for personal use at $58,000 and financed the vehicle through GMAC, the same bank that finances your floor plan. But the controller realizes he can pay off his brand new SUV using the dealership’s funds. One month later, the vehicle has been completely paid off using ACH fund transfers from your business’s operating bank account.

Having successfully paid off his brand new car, the controller realizes he can get away with new schemes. He legally incorporates a bogus towing company and creates fraudulent invoices. He then approves the invoices for payment and gives it to the accounts payable clerk, who records the payment and cuts a check. The dealership is now paying for goods and services it has never received.

As the owner, you occasionally review bank statements and month-end reconciliations. However, when you review these statements, an ACH payment to GMAC and a check payable to the phony towing company appear reasonable and in the ordinary course of business. The controller’s theft continues for six years and costs the company more than $350,000, until a temporary accounts payable assistant notices the address on one invoice is the same as the controller’s.

What can you do to ensure your dealership does not become a victim to similar schemes? There are many simple and cost effective ways to help prevent fraud.

Segregation of duties

Separating accounting and bookkeeping tasks is the best way to deter fraud. Dealers should verify that the same individual who signs checks and/or makes EFT and ACH transfers does not have the authority to prepare bank reconciliations, approve daily expenses, and maintain custody of checks, or have access to online banking.

In the situation described above, if someone other than the controller approved payments for goods and services, it would have been difficult for him to accomplish the fraudulent billing scheme.

Stick to a vendor list

Owners should create an approved vendor list and compare disbursements for goods and services to that list. If the owner had this method in place, he or she would have noticed payments to a bogus towing company.

Scrutinize invoices

Someone independent of the controller should trace payments from the bank statement to supporting documentation, such as invoices. When the invoices are pulled, the independent party should note who approved them and review the payee address. If the owner had performed such functions, the fraud could have been caught sooner. In addition, it’s important to keep an eye out for a PO Box address on invoices, as fraudsters will typically use a mailing address other than their own.

Review EFT and ACH transactions

With the increasing frequency of EFT and ACH transactions, fraud risk is also rising. Wire transfers leave no paper trail, which makes it easier for authorized and unauthorized individuals to hide activity. Therefore owners, general managers, and independent reviewers need to pay close attention to these transactions and ensure payments are supported by an invoice or other documentation directly from the vendor. Check EFT and ACH transactions on each monthly bank statement and question any unusual payments.

Mix up the staffing

Controllers and individuals who carry out day-to-day accounting functions should be required to take periodic vacations. Someone taking over in their absence serves as an unofficial reviewer of their work and processes.

Fraud can be difficult to catch, but strong internal controls decrease the opportunities. Small, inexpensive improvements, like those above, can save your dealership from a potential financial disaster.