The last few years have been unprecedented in the world of dealerships. Whether you are selling heavy equipment or sub-compact vehicles, there is a great chance that you have never seen profitability like this in your history in this business.
These profits are continued to be bolstered by supply/demand imbalances, expense reduction plans (especially in advertising), low-interest rates, and even lower inventory balances. It can be hard at times to control expenses in an environment like this – if you are solely focused on the “net income” line of your financial statement, you may be missing outliers in the line items that chip away at your gross profits as you walk your way down the income statement. If it is this easy to miss outliers presented on the financial statements, how easy do you think it is to miss things you do not even know to look for, or someone does not want you to notice? Is this the perfect time for fraud?
An accountant can recite the “fraud triangle” to you without a moment’s hesitation:
- Opportunity – reduced oversight and/or lack of internal controls due to reduction in workforce.
- Motivation – a need to pay personal expenses in a high inflation time.
- Rationalization – if the owner is making so much money and received even more in government grants and programs, aren’t I doing some of that?
The business has been happening at a frenetic pace over the last few years – PPP applications, PPP forgiveness applications, ERTC applications, shutdowns, employee illness, wiping down groceries with Clorox wipes, and not to mention just “business as usual”. The economy has seen a reduction in the workforce, and many dealerships are operating with reduced workforces, especially in their back offices. With this turnover, controllers are functioning less as controllers and more as “seat fillers”, taking on whatever needs to get done for staff that is on leave. This could be helping to allow frauds that are occurring to go unnoticed longer than they generally would. In 2016, it took an average of 18 months to discover fraud, and chances are that with big profits and reduced staff, it may take even longer now.
Scared yet? Good. If someone wants to steal something, they will generally figure out a way to do it. Whether it is time, parts, or cash, fraudsters are creative when it comes to getting what they want, at least for a while. What can you do to help mitigate the risk of fraud? The following are a few ideas, but certainly not all-inclusive, and fallible:
- Select some checks and wires from the bank statement to trace back to the supporting documents. You are playing the odds of whether you would select the check that someone used to pay their personal credit card bill, but everyone is on notice that you are looking at things.
- When is the last time you handed out payroll check envelopes? Great way to see if there are any “ghost employees” haunting your store. Like the lot guy that left 6 months ago.
- How many people at the store have access to cash coming in?
- Who is performing your bank reconciliations? If the answer is “no one” that is a bad place to start. Get on it.
It does not need to be you doing this all by yourself – Withum has automotive accountants and consultants that perform this type of work regularly. All this is to try to prevent someone from stealing, and hopefully speed up the timeframe on when they get caught. As the saying goes, “Only when the tide goes out, do you discover who’s been swimming naked”. These last few years have certainly been “high-tide” for dealerships – better make sure your trunks are on while you can.
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For more information on this topic, please contact a member of Withum’s Dealership Services Team.
