Technology is NOT Always Good

In today’s world, the only way to survive is by continually changing and seeking out new technologies that reduce expenses and make your organization more profitable and efficient. As with everything in this world, every step forward occasionally requires a step back to reflect on the inherent risks and changes that have occurred.

Many people would argue the real estate bubble, which has collapsed in several markets and is still in the process of collapsing in other markets today, represents a good example of this. As real estate prices started increasing and mortgages became easier and easier to get, an unprecedented number of Americans were able to afford and purchase houses.

Most people would argue this was not bad in itself. This country has always increased the assets each generation owns and home ownership increased with each generation. The problem began when no one was watching how far such mortgage lending was going. Controls that had been in for decades were discarded as “old school.” Many people will remember in financing their first house that total debt couldn’t exceed 36 percent of income and home mortgage debt couldn’t exceed 28 percent. These rules were all but discarded when our current housing crisis began.

A similar situation could be underway with regard to business banking and accounting. We have been hired in numerous embezzlement cases over the past several years in which funds have been taken from dealerships and other businesses. Many of these problems occur as a result of the electronic commerce that occurs daily within our dealerships. We have seen this and talked with enough people that our firm has just recently developed a program to review and test internal controls and oversee electronic transactions that occur each month.

At most new or pre-owned dealerships, more payments and receipts are taking the form of electronic transfers. By electronic transfers, I am including any transaction that is initiated electronically and does not require the physical transfer of paper between the two parties. Such transactions would include ACH transfers, direct deposits, direct disbursements, bank wires, and any other direct charges or deposits made to a checking or bank account.

More vendors, manufacturers and governmental entities are insisting that transactions be done electronically. Generally, such transactions reduce mail cost, accounting clerical help, error rates and time for transactions to occur. Many dealerships are making electronic floor plan payoffs, receipting credit card transactions, making large payroll tax and sales tax deposits and making vendor ACH payments on a routine basis.

You ask, what is the big deal with electronic transactions? To answer this, let me trace the systems that most people have to process cash disbursements. Most organizations enter an on-demand or accounts payable transaction and subsequently have some type of approval of the transaction made by a management-level person. Once approval is made, a check is cut and approved/signed by the dealer or a trusted employee. Usually a dealership with some internal controls in place has one person cutting the check and another signing the check. Normally a check signer outside of the accounting department will review the payee, the approval, and the amount paid on the check for reasonableness. Many dealers also receive and review an unopened bank statement; by doing so a dealer may identify unusual checks and/or payees. These internal control systems have functioned for decades, and while not perfect, do give a dealer a good sense of his cash flow and related disbursements. These systems also give persons within the organization a high probability of noticing unusual or suspicious payments.

With electronic bank payments, virtually all of these systems are useless. Since checks requiring signatures no longer exist, no one sees the actual payee and the amount. Generally, the accounting department initiates the transaction. Often the accounting department also approves the transaction. If the transaction is approved by someone outside of the accounting department, the approval notations on the electronic source are numeric and may appear as follows:

 ACH000092582 25.132.22 6/02/09 COMMER00812

Obviously, this is not as clear as a check made payable to Commerce Bank, account #00812 for $25,132.22 with the memo: lien payoff, Betsy Jones. Upon review of the unopened bank statement at month end, the electronic transaction appears as one of many with a numeric line item.

Many dealers report they are not as comfortable with these items as they were with paper checks. We find as auditors that these transactions are not as clear as paper checks either.

It is pretty clear in reviewing bank fraud statistics that electronic commerce is increasing the amount of fraud transactions. We have noted a dramatic increase in the amount of theft and embezzlement schemes occurring, especially in accounting departments, that involve electronic transfers and transactions.

The paperless world is great, but you must work to improve your internal control systems, policies and procedures to catch up with the electronic transactions occurring at your dealerships. To safeguard your assets, it is more important than ever to have someone well-versed in dealership accounting review your current procedures and policies. That person should review your segregation of duties related to electronic transactions and set up approval and review policies.

It is clear that the amount of electronic transactions is only going to increase over the next few years. Eventually the receipt, approval and payment of invoices and the accounting will all be done electronically. Although this represents a great time- and cost-saver, it will open the doors to internal fraud within your organization. Those people smart enough to understand the system and its weaknesses will have many opportunities for fraud within your store. Start now to improve these systems before you learn the hard way.