Fraud Audit Checklists for Auto Dealers
According to the Association of Certified Fraud Examiners, typical businesses lose 5 percent of their revenues to fraud each year. For the typical auto dealer, fraud could cost approximately $1.7 million annually. Fraudsters strike because they can, and managers usually count internal fraudsters among their most trusted employees before the deception comes to light. Conducting regular audits for fraud not only helps uncover instances of employee theft, but also reduces the appearance of opportunity to commit fraud.
The best place to start any fraud audit is by reviewing your internal controls. Examining who is responsible for what duties, how your business handles cash and how you record and balance your books can expose potential weak spots. Good internal controls deter fraud and keep regular employees honest when they get hit with a financial need. Compare your internal controls to those recommended by industry groups such as the National Independent Automobile Dealers Association or your external auditors.
Redundancy can help your dealership avoid fraud. The concept of segregating duties identifies three key roles in managing your valuable assets, such as parts or cash, which are handling, bookkeeping, and reconciling. Any time an employee can perform more than one of these functions for the same asset, such as when the shop manager is responsible for tracking parts inventory levels, that employee has the opportunity to misappropriate the asset and avoid detection. For example, having a member of the sales staff perform a physical inventory of parts can reveal whether the shop manager has been selling or using parts without recording the transaction.
Auto dealerships carry large amounts of inventory. Automated inventory systems help dealers operate more efficiently, but they can also hide fraud. Performing a physical inventory count on an annual basis, or having one conducted by an external firm, makes it known that management keeps tabs and reveals where there are shortfalls to investigate. Conducting the counts unannounced prevents potential fraudsters from being able to make the appropriate adjustments in time to hide their tracks.
Strong internal controls are effective at deterring opportunity-driven frauds. However, some people are more determined to steal and will develop complex schemes to overcome even the best safeguards. Either multiple employees might collude to get around segregated duties, or an employee might collude with someone outside the dealership, such as a vendor or identity thief, to find a more surreptitious way of bilking the company. Keep alert for employees who seem to live above their means, and review what assets they have access to. Meet every vendor and employee in person. Make up-to-date account information available, such as month-to-date reports. Ask about how certain tasks are done to ensure internal controls are followed.