Dealership Fraud by Controllers and How To Minimize It

Most dealers think dealership fraud by Controllers can’t happen to them, but it can. A long-time trusted employee commits fraud and steals money from the dealership.

A few months ago I heard of a long-time Controller than had stolen perhaps as much as over $400,000 from her dealership employer over a period of several years. I personally discovered dealership fraud by a Controller through a simple bank reconciliation project where I was engaged to catch up bank reconciliations that were a few months behind, and during the process discovered employee embezzlement. Whether small or large, any dealership fraud rattles the dealership entity at its very core.

I was a dealership Controller/CFO for fourteen years and was never tempted to steal from my employer. There are many long-term Controllers and CFO’s in the industry that would never, ever even think of stealing from their dealership. However, there is a high risk of dealership fraud because the Controller has so much power and control over the dealership’s finances.

The one person in the dealership, other than the dealer, that has the most power over the dealership’s finances, is the Controller. From the standpoint of being a CPA and Certified Fraud Examiner, that is cause for concern if steps have not been taken to minimize dealership fraud.

Most dealership entities, no matter how large in sales volume, are still privately owned businesses that are run as such. That means little segregation of duties because you normally only have one person doing one specific function. That’s make a dealership have more risk of white collar crime than large public companies, because large public companies have enough people for proper segregation of duties, and also have internal auditors and compliance staff a privately owned business simply can’t afford to have.

A Controller usually opens the mail, is the main check signer and has transfer authority over the bank accounts, has full control over the general ledger, can make journal entries with no oversight as the chief accounting officer, prepares the financial statements, usually has management responsibility and control over payroll, payables and accounts receivable, and is usually heavily involved in facilities management.

So if you’re a dealer you might be thinking, “I already knew that. Tell me something I don’t know.” Okay, here are some steps to help minimize the likelihood of dealership fraud through the Controller position.

1.  The dealer should sign Accounts Payable checks prior to anyone else either monthly or numerous months during the year. The dealer should get ALL A/P checks from the Accounts Payable clerk prior to anyone else gaining access to the checks. If there are vendors you don’t recognize hold those checks out and conduct your own investigation of who that vendor is, what they do, how they charge, and who secured that vendor. Check with departmental employees and other managers to see what they know about that particular vendor and whether that vendor actually exists, is necessary and charges fairly.
2. The dealer should periodically sign Payroll checks if you don’t already do so. Signing payroll checks is boring but can be used as an anti-fraud tool by flipping through the checks by department and asking questions about employees you don’t recognize or paychecks that seem usual for that particular department.
3. If your Controller reconciles your bank accounts, have them independently reconciled one or twice a year by either your CPA or another CPA that specializes in the automobile industry. You can hide things in a bank reconciliation by just showing them as reconciling items and carrying them forward month after month. An independent reconciliation of your bank accounts will help in two ways: 1) will help identify suspicious transactions shown as a reconciling item, and 2) will help identify old items on the bank reconciliation carried forward from month to month that need to be researched and resolved instead of always being shown as a reconciling item.
4. If your floor plan lender does not have a requirement for an annual audit or review, hire a CPA familiar with the dealership industry to come in once a year and flip through all of your accounting schedules and analyze all of your non-scheduled balance sheet accounts for old items that need to be researched and resolved. Old receivables that aren’t collectible aren’t an asset; they’re a write-off against net income. It helps to have someone other than your Controller verify the accuracy of your books and records and in the process, look for unusual or suspicious items.
5. Consider an employee hotline for reporting fraudulent activity. A lot of employees will never “rat out” a fellow employee even if they believe the employee is doing something wrong, but they may be willing to report the activity if they can do so anonymously. Most tip hotlines are independent companies that provide this service for a monthly fee. The caller remains anonymous but the tip is reported to you, the dealer, for investigation and resolution. If you need some help identifying some of these companies, please contact me and I’ll be glad to help.
6. Consider establishing an anti-fraud policy in writing as part of your employee packet for new hires. This form can also be executed by current employees upon implementation of the new policy. The point of this written policy is to reinforce in writing that fraudulent activity is not going to be tolerated, that there are serious consequences including termination and potential criminal prosecution, and it helps employees recognize they have a fiduciary responsibility to the company and to their fellow employees to report any fraudulent or suspicious activity. If you need assistance on how to get started with a written anti-fraud policy, let me know and I’ll be glad to help.
7. Last but certainly not least, there must be a “tone at the top” that fraud and abuse will not be tolerated. The dealer must lead by example. If the dealer is a little shady and tends to skirt the rules a little bit here and there, the employees see that and think it is okay for them to do likewise. The dealer might think bending the rules now and then is an executive privilege that goes with ownership so they can do it even if no one else can, but that’s not how the employees see it. The employees see it as, “If the dealer does it, I guess it’s okay so we can do it, too.” The dealer must set a tone of honesty and integrity for the dealership in order for any anti-fraud policy or procedures to be effective.

Greg DeFoor, CPA, CFE, the owner of DeFoor Business Services, Inc. in Kennesaw, GA, has extensive auto dealership industry experience. He may be reached at 678-919-2230 or gdefoor@defoorservices.com.