Pub. 4 2014 Issue 1

16 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com E ver y dealership i s at r i sk for theft and financial misstatement. These threats are especially high if a store lacks formal, regularly reviewed internal controls. Here are some ways to take command of yours. Is your accounting accurate? The first element of a strong internal control system is detailed, current and ac- curate financial information. Reliable fi- nancial statements help dealerships detect fraud early and document the fraud trail, if abuse takes control. One sign of weak internal controls is an accounting department that fails to gener- ate a balance sheet and income statement until two or more weeks after month’s end. Accounting should post all transac- tions daily, including new and used vehicle sales, repair orders, invoice payments, and payroll and cash receipts. By 1 pm on any given day, you should have access to real-time checkbook bal- ances and other accounting information effective as of 5pm the day before. That way, you might be able to catch the first signs of fraud. Conventional safeguards Conventional safeguards, such as pass- words, alarms and locks, are obvious ele- ments of internal controls. But sometimes these fall by the wayside. To illustrate: A dealership’s general manager forgot the parts storeroom key at home on audit day. When touring the facility, the CPA was shocked that GM was able to enter the parts area through the exterior shipping door without being detected by anyone. So much for security! Periodically review your safeguards and reinforce them, if necessary. Require employees to change their passwords quar- terly and replace the locks when a manager terminates employment. Operational controls Operational safeguards mitigate the opportunity to commit fraud. Here are some real-world scams and ways that op- erational controls might have reduced or prevented losses from spiraling: Checks and balances. Consider the parts manager who stole $70,000 by selling parts on the side and pocketing the cash. The loss could have been significantly reduced if the owner or CFO had thought like an internal auditor and performed random inventory counts throughout the year, rather than waiting for the CPA to physically verify inventories at year end. Segregation of duties. Another dealer- ship lost nearly $16,000 when its cashier was caught stealing cash by voiding service orders and falsifying deposit slips. The ca- shier’s responsibilities included collecting cash, issuing receipts to customers, pre- paring the daily deposit slip and reconcil- ing the daily cash report. The loss might have been prevented if the dealership had separated these jobs. As a rule of thumb, employees who record and reconcile trans- actions should never have access to those assets (including being a signer on any bank accounts, and so on). Background checks and dealer in- volvement. Another dealer was shocked to discover that the general manager was routinely wholesaling used cars at a loss to the dealership, because he owned a 50% interest in the wholesaler. A better pre- employment screening process could have helped detect such conflicts of interest as well as any criminal history. It can also identify people with poor credit histories, who might have a financial incentive to commit fraud. Taking Command of Your Internal Controls