Pub. 6 2017-2018 Issue 1

24 San Diego Dealer STRENGTHENING INTERNAL CONTROLS TO PREVENT FRAUD By Thomas England Fraud is a reality among every dealership nation- wide. This is a tough, yet simple truth. Fraud is often not detected until after the crime has been committed. According to the Association of Certified Fraud Examiners (ACFE), the average time to identify fraud is 18 months after the fact. Furthermore, roughly 58%of cases have no recovery whatsoever. [1] This statistic is chilling, as it indicates many organizations fall victim to significant loss with slight hope of financial repossession, regardless of fraud detection and response measures. Many times, business owners accept the risk, as they don’t want to pump additional resources into addi- tional staff or other control-related activities (like internal audits). However, it’s important to understand what you do have control over along with some relatively simple, yet critical controls to implement. Who Commits the Crimes? You might be surprised by the most common fraudster - the trusted employee. ACFE reports that 53% of employees committing fraud have been with the organization for more than 5 years, and more than half of fraud schemes are perpetrated by an employee between age 41 and 60. If fraud is occurring in your dealership, it’s likely the perpetrator is a trusted employee with access to account numbers, passwords, financials, etc. Unfortunately, it’s common for good people to make poor decisions based on circumstance. Internal fraud often happens when an employee finds himself/herself in an ill-fated personal situation (i.e., divorce, medical expenses, financial difficulties, etc.). In fact, the “fraud triangle” - which is comprised of the three elements of rationalization, opportunity, and pressure – applies to most cases of occupational fraud. If a dealership employee is in a personal bind (lining up with the pressure element), and either rationaliza- tion or opportunity presents itself, the gate- way to committing fraud opens. Therefore, when considering the fraud triangle, the only element the dealership has control over is the opportunity to commit fraud (whereas rationalization and pressure are outside the control of the business owner). To make fraud prevention measures a top priority, dealers must understand that trust is not a control. A Good Starting Point While there aremanymeans of fraud prevention, start by tightening up your internal controls. For example, many dealers fall into the trap of either “smoothing” earnings throughout the year, holding on to “rainy day” accruals, or reclassifying certain income line items to make their numbers look better. This practice makes it tougher to analyze monthly financials and may cloud the ability to detect anomalies. As such, accurate, up-to-date financial information of your dealership is a primary element of a strong internal controls function and may help you detect fraud early. Dealerships often lack a sophisticated internal controls system, as many dealers’ budgetary priorities and time don’t accommodate its implementation. However, the benefits often outweigh its cost, as the expenses associated with fraud response measures (not to mention the dollars lost from the fraudulent act itself ) are damaging. What Does My Internal Controls System Look Like? While a thorough internal controls assessment may be a good idea, regardless of how well you think everything is running, there are several signs you can look for that indicate weaknesses. Key indicators may include, but are not limited to: • Lack of segregation of duties, specifically around high value assets or assets easy to get“legs,”such as cash and parts. • Lackof a timely reconciliationprocess and review on key accounts. • Outdated computer/software systems. • An accounting department that doesn’t post daily transactions (including new/used vehicle sales, cash receipts, repair orders, invoices, etc.). • Anaccountingdepartment that consistentlypro- ducesbalance sheets and income statements late • Inconsistencies in journal entries or frequently adjusted entries. • No real-time access to checkbook balances and accounting information effective as of the prior day’s close of business. • Anaccountingdepartmentthatdoesn’ttimelyrec- oncile intercompanyor relatedparty transactions.