How Much Do Internal Controls Cost?

Industry newsletters and magazines constantly remind dealers of the importance of having strong internal controls, but the articles rarely detail specific ways to uncover and avoid employee theft. Several easy procedures can strengthen your dealership’s internal controls without adding staff.

Most accounting departments in dealerships are small, so it can be difficult to segregate job responsibilities and provide for the proper checks and balances that mitigate the risk of fraud. However, many dealerships have controls in place that they do not even realize are there. For example, monthly bank and floor plan reconciliations and physical inventories of vehicles are just a couple controls that most dealerships already use.

What about employee vacations? Besides giving an employee a break, a dealer (or the staff member who takes over the duties) will quickly find out if the employee is performing with integrity. While many dealers value the employee that is there from “bell to bell” and who even works from home, there may be a reason the employee keeps this type of schedule, and it may be self-serving.

Another easily implemented basic control is to physically hand out paychecks. Besides adding a personal touch and providing a great way to stay connected with employees, this simple task helps prevent a common fraud scheme: paying fictitious employees.

Bank statements offer more opportunities for internal control. Where is your dealership’s bank statement mailed? Why not have it mailed to the owner’s home? When is the last time you reviewed the monthly bank reconciliation? You do not need to be an accounting expert to ask questions about it. Simply asking for the bank reconciliation may make an employee think twice about hiding something. If the bank reconciliation is not completed on time or if the person who prepares it is also a check signer, opens mail, and makes bank deposits, you should be concerned.

Most of these ideas are standard business practice, so it is surprising to learn how few of them are consistently used. For instance, everyone knows you are supposed to run background checks as a requirement of employment. However, in a recent embezzlement case at a dealership, the employer did not check the office manager’s background. This simple step would have revealed two prior convictions for fraud.

Though some of these controls are a little bit time-consuming, your efforts will either prevent fraud or reassure you that your controls are working. Here are some additional questions for evaluating internal controls:

• Do you look at the address when signing payable checks to vendors?

• How many of those checks were addressed to post office boxes?

• Have you ever compared the addresses of your vendors to the addresses of your employees? (Dealers typically look at the detail attached to the check, make sure the expense was properly authorized, and ensure the name seems familiar. But what would keep someone from duplicating an invoice and changing the address?)

• Have you ever attempted to submit a request for payment to the dealership from a vendor that did not exist?

• When is the last time you changed the locks at your dealership? Do you have a system that ensures all keys are accounted for?

• Are customers given access to areas of the dealership where only employees should be? (Parts departments with multiple access points provide an easy way for parts to disappear.)

• When is the last time you performed a surprise count of petty cash?

As the business environment changes, the need to re-evaluate the effectiveness and structure of internal controls becomes even more important. For example, 10 years ago electronic fund transfers were just becoming popular. Today many finance companies require dealers to have this capability. The inherent risk in the anonymous nature of this type of transaction is that, with a password and a computer, any employee can move the dealership’s cash. They don’t even have to be at the dealership.

Testing the controls in a dealership accomplishes several things. Besides confirming that the controls in place are working, it also may identify ways to strengthen your current controls. Taking the time to review your control environment and develop processes to limit the risk of fraud is a worthwhile investment. How much are strong internal controls worth? Unfortunately, the answer is usually revealed after fraud is discovered.