Pub. 1 2011 Issue 4

12 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com tremendous amount of financial transactions inherent in dealerships: customers going to the service department, ve- hicles being sold new and used, customers buying parts over the counter, buying from and selling parts to other dealer- ships, etc. All of these increase the potential for fraud. It can be difficult to find the suspected fraud needle in the dealership accounting system haystack. If fraud is occurring, it may be a challenge to find a particular transaction, even if the books are in immaculate condition. If records aren’t in the best condition (books are typically intentionally kept in bad condition if fraud is occurring), finding an individual transaction can become the proverbial “needle in a haystack.” There tends to be a high volume of electronic fund transfers (EFTs). With EFTs, fund transfers – often large amounts of money – are conducted instantly, and they’re typically irreversible. At any given time, dealerships may have millions at risk. Poor segregation of duties is common. Even in the best of times, segregation of duties or incompatible job functions is usually a problem. Failure to implement appropriate in- ternal control procedures exposes a dealership to tremendous vulnerability. Dealerships typically allocate inadequate attention and resources to evaluating the cost versus benefit of internal controls. Most auto dealers don’t sit down and say, “Let’s talk about internal controls,” but they should. Internal controls should be evaluated at least once per year and when any significant changes occur at the dealership (staff departures, new hires, etc). ¡ Employee time is highly leveraged for duties other than internal control-related matters. Many dealerships don’t feel they have the time to implement appropriate checks and balances. ¢ Poor economic conditions can have a serious risk- increasing impact. The inherent fraud risk factors mentioned above mandate that it is critical, given the varied types of vulnerabilities faced by a family owned automobile dealership, that they be con- stantly on guard and skeptical (eyes open) as to what is going on within their businesses, as well as adopt and implement ap- propriate internal control procedures. Most automobile dealers are aware that many fraud vulner- abilities exist in their businesses and they worry about it. In the past, when I have conducted lectures to automobile dealer audiences on fraud-related topics and have asked the audience the question: “How many of you have been victimized by some form of fraud in your dealership?” On every occasion, the vast majority of dealers in the audience raise their hands. Q risk factors — continued