I know you don’t want to talk about employee theft, fraud or embezzlement. It is an uncomfortable topic to discuss or think about. Some know it’s happening right under their noses in the dealership and try to detect and prevent it. And then there are others that bury their heads in the sand and live in denial.
The purpose of this blog here is to raise awareness for employee fraud and embezzlement. I intend to offer you support and advice to help you limit your dealership’s exposure to fraud and theft.
There are three factors that are usually present when an employee commits a dealership theft: motivation, justification and an inherent weakness in the dealership’s accounting and/or internal controls.
First, let’s talk about the motivation behind what would cause an employee to steal. Financial pressures such as bad credit, very high medical expenses, recent divorce and living beyond his or her personal means are good examples of what could drive an employee to steal. The employee could also be involved with vices that they cannot support such as gambling, an extra-marital affair or drug and alcohol use. This is why it is so important to be “in touch” with your employees and pay close attention for these types of behaviors and possible vices.
The second element usually present in cases of fraud and embezzlement is justification. Employees may justify stealing because they feel under appreciated and possibly underpaid. I have seen many accounting staff steal because they feel that they are underpaid in relation to other dealership employees. Some employees justify stealing because they have bad relationships with other managers and employees staff. The biggest reason that I have seen in my 20 years in the powersports industry is that the owner’s were perceived as being “rich” and could afford the loss.
The third element present is a weakness in the dealership’s accounting or related internal control systems. Employees who are considering theft look for the fastest (and most financially lucrative) pay off. These employees analyze where the dealership’s weakest areas are and then attack! For example, an employee who knows that the bank accounts are not reconciled may find a way to steal through the checkbook, either through accounts payable and manipulating daily deposits.
Below are some common ways employees steal and suggested ways to detect and deter such events:
- — Make sure employees take vacation every year. This should not be an option but mandatory. In my experience, when employees are out of the dealership their actions and secrets are exposed. Do not be fooled by employees that only take “long weekends.” Mandatory vacations are an excellent internal control.
- — Have the bank mail the bank statements, or a copy of it, directly to the owner of the dealership. Owners: Make sure you review all transactions and question items that you do not recognize. Pay close attention to electronic fund transfers out of your account. By doing this, you are letting your staff know that you are looking deeply at cash and this alone is an excellent deterrent.
- — Dealer Principals: Open your own mail! I know it sounds silly but you will learn more about your business by opening all dealership mail. I have seen vendors send your employees “kickback checks,” airline tickets, vacation packages and other “gifts” to earn your business. All sorts of things could be detected — and prevented — by opening and sorting dealership mail.
- — Do not put all of your eggs in one basket. Never put that much confidence or responsibility on one person in the dealership. Unfortunately, by putting that much responsibility on one employee, it creates an environment that is ripe for fraud and embezzlement. In many cases, it is the trusted employee of the dealership that commits fraud and theft. You are asking for trouble if you have a single person charge of all dealership management and/or accounting systems. Recently, a general sales manager was prosecuted for a dealership fraud exceeding two million dollars. In another dealership, a 20-year veteran in the accounting department was able to systematically embezzle hundreds of thousands of dollars and lived a very lavish lifestyle. In the end, the dealership lost and the owners were financially and emotionally devastated. The solution here is to spread responsibility for internal controls and management across a few people.
- — Make sure your bank statement is reconciled. Cash is the most elusive asset in the dealership. The best internal control on cash is first to have the management of it separated. The person preparing checks should not be the person approving them or signing the check. I know we have to wear many hats in a dealership, but you are inviting trouble when cash is not reconciled in a timely manner. In order protect your cash, reconcile your bank statements on a monthly basis.
- — Secure your customer data. With identity theft at an all-time high, make sure your customer information is secured from prying eyes. All it takes is a name, birthdate, address, employer and social security number to assume someone’s identity. This information can be very valuable on the street. Make sure your internal controls and system security protect your customer data.
- — Implement a “Whistle Blowers” policy in your dealership. Make it known that fraud and theft will not be tolerated and those who commit these crimes will be prosecuted. This provides a safe environment for others to expose potential fraudsters in your dealership.
Forrest Flinn, MBA, PHR, SMS has been in the motorcycle industry for nearly 20 years and has been a true student and leader serving in various capacities. He previously worked as an implementation consultant for Lightspeed and as a general manager with P&L responsibility for a large metro multi-line dealership. Currently Forrest is the managing partner and chief visionary for a consulting firm that specializes in outsourced accounting, human resources, social media strategy, dealership operations consulting and Lightspeed/EVO training.