Reduce temptation, employee fraud with these 10 best practices

Most employees are trustworthy.

You know you can run your dealership without worrying about them committing fraud or theft which could cost you thousands of dollars a year.

But … it only takes one to wreak havoc on your business.

“Dealers who become victims of employee fraud tend to place unrestricted trust in those they shouldn’t,” wrote John Buelow, dealerships principal at Clifton Larson Allen consulting firm, in Reducing Risk: Top 10 Best Practices for Preventing Internal Fraud in Dealerships.


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“In their belief in common decency, they fail to remove all temptation from their financial and operational protocols,” the consultant wrote. “This makes it just a little too easy and all too irresistible for less honest employees to rob them from right under their noses.”

RELATED: The everyday language of building a better business model; Steering a New Course: Watch out for signs of fraud on the road to a better business model

Victims shared four distinct preventive shortcomings, according to Buelow:

  • They were caught off guard.
  • Part-time or absentee owners, especially, often trusted their employees completely.
  • They either did not have internal controls or their controls were not followed consistently.
  • The perpetrator was caught by chance, not through systematic fraud controls.

“I’m not suggesting that you place suspicion on each of your dealership’s employees or categorically regard people as crooks,” Buelow wrote. “But unless you recognize that internal theft is a risk inherent in every business and take measures to keep it from happening, you leave yourself vulnerable.”

Following are Buelow’s 10 best practices to help prevent or uncover employee fraud:

  1. One individual should not control all functions in the finance department – accounts payable and receivable, cash and bank reconciliations, receivables write-offs, customer credit card refunds, titling, etc.
  1. Monthly cash reconciliation to the penny. Train multiple people in your finance department to perform this essential duty, and change the individual who performs this task from time to time.

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  1. Mandatory controller vacation. Cross-train personnel so they can cover for the controller, then require the controller’s absence on several consecutive days each year so that “other staff have to get their hands and eyes on the controller’s business.”
  1. Mail control. Personally open all invoices and payments that are sent to your business. “These should never be delivered directly to the AR and AP departments still sealed up.”
  1. Annual vendor audit. Pull a list of your vendors and corroborate each corporate name, DBA, address, owner’s name, and phone number, then call to verify the vendor’s authenticity.
  1. Journal entry and general ledger reclassification reviews. Scour the books for “financial acrobatics” and “tricky maneuvers” that might indicate fraud.
  1. Engage a CPA to drop in with a day’s notice – or no notice at all – to inspect the books onsite.
  1. Parts department controls. Monitor purchasing, look for excesses and imbalances in vendor patterns, and hire an outside party to manage parts inventories. Lock parts rooms and only permit access in pairs with strict, written checkout protocols.
  1. Used and rental/loaner vehicle controls. Conduct regular spot checks of vehicles and their management protocols to ensure vehicles are physically present.
  1. Welcome and encourage whistleblowers. Assure confidentiality for employees who suspect or witness fraud by taking steps such as establishing a fraud-tip hotline.

“As a trusting business owner, it can be difficult to enforce such wary measures, but the value of these controls can’t be overstated,” Buelow wrote. “When you understand and practice the power of prevention, you may not have to suffer losses, prosecute employees, and incur other costs of fraud.”

These best practices may take you a long way toward that goal.

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