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The top 10 #fraud #risk factors inherent in #dealerships - Aryan Consulting

Updated: Jul 8, 2023

Auto dealerships are unique businesses — and uniquely susceptible to fraud. Keep your assets where they belong by monitoring these 10 fraud risk factors.

There are a variety of fraud risk factors inherent in auto #dealerships; it’s just the nature of the beast. But that doesn’t mean there aren’t ways to control for them. The best defense? A good offense. Knowing what risks are out there better positions dealerships to guard against them.

  1. Multiple businesses mean multiplied risk. A dealership consists of multiple businesses within one. New vehicles, used vehicles, service, parts, body shop — each of these runs as an independent business under one roof. This makes things extremely complicated, as each department has its own fraud risk factors, making it more difficult to monitor and manage.

  2. Auto dealerships bring in a significant amount of money, which means more to steal. Dealership capitalization is typically in the millions. It takes significant funds to operate a dealership — meaning there are significant funds available to take.

  3. Dealerships are full of what can easily become black market hot-ticket items. Dealership assets such as cars and parts are highly marketable. Most dealerships reconcile only at year-end, but consider increasing that to every month to make sure assets aren’t finding their way off the dealership’s property without your knowledge. And tangible assets aren’t the only thing auto dealerships need to protect — names, phone numbers, Social Security numbers, and customer information are vulnerable as well.

A dealership consists of multiple businesses within one, and each has its own #fraud #risk factors.

  1. A high volume of transactions means more opportunities for fraud. There is a tremendous amount of financial transactions inherent in dealerships: customers going to the service department, vehicles being sold new and used, customers buying parts over the counter, buying from and selling parts to other dealerships, etc. All of these increase the potential for fraud.

  2. 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.

  3. High amounts of EFTs can leave dealerships exposed. Dealerships tend to have 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 of dollars at risk. It’s crucial to establish appropriate security procedures within the dealership and with your bank to protect against this potential nightmare waiting to happen.

  4. Staff are often wearing too many hats, leaving several activities unsupervised or unfinished. Poor segregation of duties is common. Dealerships tend to be family-owned, and even in the best of times, segregation of duties can be a problem. Failure to strategically implement these controls exposes a dealership to tremendous vulnerability.

Experts say that three factors must be present for a fraud to occur: pressure, opportunity, and rationalization.

  1. Your internal operations aren’t going to control themselves. Dealerships typically allocate inadequate attention and resources when 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 anything significant occurs at the dealership (staff departures, new hires, etc.).

  2. Even when internal controls are considered, busy staff may not find time to follow through. Employee time is highly leveraged for duties other than internal control-related matters. Many dealerships feel they don’t have the time to implement appropriate checks and balances. For example, it’s vital that someone other than the cashier fill out the bank deposit slip and review bank reconciliations. Failure to do so exposes a dealership to lapping schemes. A simple solution for a lack of time to dedicate to internal controls is to hire a controller — the money they help you hang onto and the time you’ll save will be worth the extra expense.

  3. Pressure to commit fraud can surface at any time. Experts say that three factors are usually present for a fraud to occur: pressure, opportunity, and rationalization. Pressure can be many things, such as commission checks coming in less frequently, a spouse losing a job, or a gambling addiction. The previous factors all offer opportunity; it’s only a matter of time before some individuals will begin rationalizing (“They can afford it;” “They won’t miss it;” “Everybody else is doing it”) and exploit those opportunities.

Once these risks have been identified, the next step is to begin making changes to better control them. Preventative steps like increasing the frequency of inventory counts and improving internal controls can keep fraud at bay, but don’t forget to make a recovery plan in case an employee gets their hands on your assets illegally. If you haven’t already, adding employee dishonesty coverage to your insurance policy can reimburse the dealership for the loss. Hiring #management #auditors (like the ones at Aryan Consulting) can investigate and, prevent such occurrences.

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