Pub. 7 2017 Issue 3

19 M ost business owners don’t want to spend money on preventing fraud. After all, they might not think they can afford to hire more employees or have an outside company come in to conduct internal audits. But that doesn’t mean business owners are helpless when it comes to preventing fraud. The Association of Certified Fraud Examiners (ACFE) has determined that the time between a fraud taking place and its discovery is 18 months. Once the fraud has been discovered, 58 percent of all cases have no recovery at all. What does that mean for your dealership? If someone does defraud your business, you don’t have much chance of getting any of the money back again. Worse, the person who is most likely to commit fraud is someone who works for you. According to the ACFE: • Employee s who commit f r aud have usually been employed by the organization where they work for more than five years. • Half of all frauds are committed by employees who are between 41 and 60. In other words, the person who is most likely to steal money from a dealership is someone who has been working for the dealership for a few years and who is old enough to be trusted with information such as account numbers, passwords, and financials. That person might seem trustworthy right up until the dealership finds out otherwise. Why would an employee steal from an employer? There are three key elements: • Pressure: Problems such as debt caused by divorce or medical expenses can put pressure on an employee to find additional funds. • Rationalization: Some people will never steal, no matter what the circumstances are; some people will steal whenever they are given the opportunity; and some people will only steal when they feel pressured by the need to find more money. • Opportunity: Too often, businesses have lax internal controls that make it easier for someone to redirect funds from the business in some way. Business owners cannot cont rol whether employs are under pressure or whether those employees are likely to rationalize stealing. What they can control is whether there’s an easy opportunity for someone to steal money. Wh e r e s hou l d a d e a l e r s h i p ’s management start? Look for the areas that would make it easy for someone to steal from the dealership. • Lead by example. If the management of the dealership sets an example about being honest, employees are likely to follow that example. Communicate ethics and values formally and informally. Write codes of conduct; talk about ethics and values in staff meetings and in memos; and discuss them with employees on an informal basis whenever it would be appropriate. • Make it easy for employees to tell management that there is a problem. It should be confidential so people know they can report unethical behavior without putting themselves at risk. One way to do this is to create a fraud hotline for employees to use. • High-value assets, and assets that are easy to steal, such as parts or cash, should be dealt with by more than one person. The person who records a transaction should not be the person to reconcile assets. Whoever reconciles assets should not have access to accounting records. The person who writes checks or initiates ACH transfers should not be allowed to prepare the bank reconciliation. If the business budget is tight, the owner can get involved in the financial statement process and that alone will make it less likely for someone to steal from the company. If the dealership can afford to have two or more people doing the work, management needs to consider how close the relationships are of the employees who are involved since two people who are best friends are more likely to cooperate and cover for each other. • Accounting departments need to post daily transactions. It should be possible to get real-time access to checkbook balances and accounting information no later than the next business day. This includes cash receipts, invoices, repair orders, sales of new or used vehicles, and other items. They should also put together balance sheets and income statements on a timely and regular basis; being late on a regular basis with these reports is another red flag. • General journal entries should be reviewed once a month. The person doing the review should look for anything large or unusual that would affect profit and loss accounts, such as cash entries and entries to parts inventory. If possible, limit the number of manual entries that can be posted to Internal Control By Susan Morgan, The newsLINK Group n Internal Control — continued on page 20