March 11, 2009
A dealer in the southeast recently experienced a $95,000 theft loss as the result of the following scheme. The perpetrator of this theft, we’ll call her Betty, made entries to the cash clearing account via the purchase journal. The cash clearing account is used to process each day’s parts and service sales and should balance to zero at the end of every day. Betty’s entry allowed her to short the daily deposit by the amount of her entry without the books being out of balance.
The entry made via the purchase journal “represented” a bogus credit memo from a vendor. Instead of reducing the cash sales account, a real credit memo would have reduced the parts inventory. In order to reconcile the vendor statement to the dealership’s books, Betty showed this bogus credit memo as open at the end of the month. The following month she recorded the entry to eliminate that credit memo and set up another credit memo for the same amount. This second entry’s purpose was to give the appearance that the open credit memo was from the current month and, therefore, looked appropriate on the outstanding list.
Ultimately, a vendor (not necessarily the same vendor) actually issued a valid credit memo. Betty then relieved some of her bogus credit memos and plugged the balance as a reduction to the parts inventory (where the entire credit should actually have been posted anyway). In essence she covered her theft by applying the valid credit memo to various vendors instead of the parts inventory.
Eventually, Betty no longer went through the laborious process of posting items through accounts payable and falsifying the monthly vendor reconciliation. She simply reduced the cash sales account and increased the parts inventory balance. In this way she was still able to reduce the daily deposit amount and pocket the cash.
There are many other ways that dealership employees have been stealing from their dealerships. Please ensure that your dealership’s internal controls are in place and functioning.
It is estimated that internal theft costs employers $9 per employee per day. This amounts to $280,000 a year for dealerships with 100 employees.
The dealerships that are most vulnerable to this type of theft are those with fewer than 100 employees.
50% of all dealers experienced theft during a 5-year period during the 90’s and that percentage has been growing at an alarming 5% annually. This means that the majority of dealers can expect to be victimized by theft of some type every year.
Reports indicate that 80% of all dealership employees have been involved in some sort of theft from the dealership where they work during the last 5 years.
Theft or fraud is most likely to occur in departments where cash or other valuable assets are handled but there is significant risk in all departments.
It is reported that the risk of loss is greater where poor or nonexistent internal controls are in place.
95% of all losses paid by insurance carriers results from actions taken by employees.
$100,000,000 worth of vehicles is stolen from dealerships every year. $50,000,000 worth is recovered and $50,000,000 is paid for by insurance.
Good loss prevention programs and internal control systems have been proven to halt loss experience growth of 10-15% annually and actually reduce losses by 30%
Theft schemes have been discovered in virtually all departments of dealership operations. The ingenuity of perpetrators is the ONLY limit on the manner in which dealers are being defrauded.
Dealership size isn’t a reliable indicator of the potential risk. Large dealerships with many employees offer a crowd for the dishonest to hide in while small dealerships don’t have the personnel and systems in place to prevent fraud. Theft and fraud rates grow in good economic times because less attention is focused on losses when times are good and they increase in hard economic times because thieves work harder at their craft when the need is the greatest.
You can take steps to reduce your exposure to employee theft by having a risk assessment of your dealership done. Your CPA should be able to provide you with this service, reviewing all aspects of your dealership operations and providing you with an assessment of the risk as well as some recommendations, which should include some type of demo plate control system, for managing and reducing those risks. Imagine eliminating losses of $9 per employee per day. Nice addition to the bottom line don’t you think?
Ray,
Thank you for your comment. We wholeheartedly agree with your statement that “Your CPA should be able to provide you with this service.” We would just like to add that dealers should engage a CPA who is familiar with the industry.
All the best - Rex
Rex,
We would be more than happy to provide you with referrals should our clientele inquire about this type of service. I could add your blog to our blogroll and vice versa.