Although auto sales plunged at the start of the COVID-19 pandemic, they’ve since rebounded. In fact, some dealerships are reporting record sales in 2021. Problems remain — including supply bottlenecks. Also, your dealership may be more vulnerable to fraud. Factors such as employees working from home, new vendors and even booming sales, can put your business at risk. Here’s how to prevent fraud from cutting into profits.

Focus on accounting

Fraud prevention starts with strong internal controls. For example, good controls generally require a dealership’s accounting department to post transactions daily, including new and used vehicle sales, repair orders, invoice payments, payroll and cash receipts.

By 1 p.m. on any given day, you should have access to real-time checkbook balances and other accounting information effective as of 5 p.m. the day before. Timeliness makes it easier for you to spot the first signs of fraud and use the data to catch a perpetrator before he or she gets away with theft.

Protections that work

Complex computer passwords that must be changed frequently, background checks on employees and vendors, and security cameras are also essential to preventing fraud. But these protections may have fallen by the wayside during the pandemic. Review your safeguards now and ensure they’re being used.

Your business should always “segregate” duties. Generally, this means that certain tasks, such as managing payroll, are broken into pieces and performed by more than one employee. This limits opportunities to perpetrate fraud and cover up the crime. If you don’t have enough workers to properly segregate duties, consider outsourcing one or more accounting functions to a third-party service.

Loose controls lead to losses

To understand how loose controls can facilitate theft, consider the real-life example of a parts manager who stole $70,000 by selling his employer’s parts and pocketing the cash. If the dealership’s owner had performed random inventory counts throughout the year, rather than waiting for his CPA to physically verify inventories at year end, he could have prevented or limited losses.

In another case, a dealership caught its cashier stealing by voiding service orders and falsifying deposit slips. The cashier’s responsibilities included collecting cash, issuing receipts to customers, preparing the daily deposit slip and reconciling the daily cash report. A loss of $16,000 might have been prevented if the dealership had segregated these duties.

Back to normal

The pandemic is waning. But that doesn’t mean you can afford to relax fraud protections. If you didn’t get a chance to properly vet new workers or vendors in the past year or haven’t kept up with inventory checks, get back to your usual controls as soon as possible. Contact us if you need help or if you suspect fraud in your dealership.

© 2021 Covenant CPA

To prevent occupational fraud from cutting into your auto dealership’s profits and generating negative publicity, you need a strong internal controls system. And effective controls start with current and accurate financial statements.

It starts in accounting

One sign of weak internal controls is an accounting department that fails to generate a balance sheet and income statement until two or more weeks after month’s end. Accounting should post transactions daily, including new and used vehicle sales, repair orders, invoice payments, payroll and cash receipts.

By 1 p.m. on any given day, you should have access to real-time checkbook balances and other accounting information effective as of 5 p.m. the day before. That way, you might be able to catch the first signs of fraud and use the data to catch the perpetrator.

Tried and true methods

Complex computer passwords, background checks and security cameras are essential to preventing fraud. But sometimes these protections fall by the wayside. Periodically review your safeguards and ensure they’re being used. For example, require employees to change their passwords quarterly, conduct regular inventory counts, engage outside CPAs to perform audits and segregate accounting duties.

As a rule of thumb, employees who record and reconcile transactions should never have access to those assets (including being a signer on bank accounts). Give the segregation of duties a starring role in your internal controls program.

Real life examples

To see how such controls can reduce losses, consider this real-life scam. A parts manager stole $70,000 by selling his employer’s parts and pocketing the cash. The loss could have been reduced if the owner had performed random inventory counts throughout the year, rather than waiting for his CPA to physically verify inventories at year end.

In another case, a dealership caught its cashier stealing by voiding service orders and falsifying deposit slips. The cashier’s responsibilities included collecting cash, issuing receipts to customers, preparing the daily deposit slip and reconciling the daily cash report. A loss of $16,000 might have been prevented if the dealership had segregated these duties.

Another dealer learned that his general manager was wholesaling used cars at a loss to the dealership because he owned a 50% interest in the wholesaler. A better pre-employment screening process might have helped detect such conflicts of interest as well as any criminal history.

Be involved

We can help you bolster your dealership’s internal controls. But your involvement is essential to preventing fraud. Let employees know that you personally review bank statements, order test counts of inventory and examine adjusted journal entries. Knowing that you’re paying attention will discourage most thieves. Contact us for more at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA