Your greatest risk for loss from fraud is a senior manager operating without proper controls. Employees working in accounting and purchasing are your next-greatest threat. Persons working in IT, HR and R&D are least likely to perpetrate a fraud against your company.
These are the findings of a survey conducted in 2010 by the Association of Certified Fraud Examiners and used here with permission. The ACFE analyzed 1,662 cases of fraud in many different environments and determined both the department of the person committing the crime and the average size of the loss. Their findings are presented in the chart on the left.
Several things stand out in this report. First, with 14 senior managers, they are the third-largest group of people committing fraud, and they took an average of $829,000 per occurrence for a total of $11.6 million. This combination puts them at the top of the fraud danger list.
The accounting department is the second workgroup that emerges as a risk to the company. Twenty-two percent of frauds are committed by those employees, but the average amount taken ($180,000) is far below that of managers. Total for them in this study is $3.96 million.
Purchasing, board members and legal departments all are responsible for large amounts of money taken, in spite of their low numbers of involvement.
IT, HR and R&D are on the bottom of the list, with relatively small dollar amounts and few people involved in illegal activity.
After identifying who steals and how much they take, the ACFE report focuses on the various tools used to prevent fraud and the effectiveness of each. That study is summarized in the chart [above], where the red line indicates the reduction in the median loss when the stated control is in place. The two bars indicate the loss amount before and after the control is put in place.
It is clear from this study that the most effective ways to prevent or reduce fraud are maintaining the following:
Where these attitudes and programs are not found, fraud averages $245,000 per occurrence. When they are in place, the average fraud drops to $100,000, or a 59-percent reduction.
A comprehensive list of controls and the effective reduction rate for each in the chart labeled “Fraud Deterrents.”
As I review this list and think of the powersports environment, it seems to me that with the exception of only the independent audit committee and certification of management in fraud detection, all of these measures are feasible in a dealership.
As we emerge from this two-year recession, auditors and forensic accountants alike are reporting an increase in fraudulent activity. There has been an increase of 20 percent in the last 12 months, from $1.4 million to $1.7 million per $1 billion of sales. And this is at a time when every returning dollar is so greatly needed.
I recall a dealer friend who discovered — quite by accident — a fraud that cost him $400,000. After it had been resolved, he was telling a group of us about the ordeal. But surprisingly, he appeared rather happy about the whole thing. We asked him about the seeming incongruity, and he said, “Hey, I just lost $400,000, and I’m still here!”
He could do it. You may not be so lucky.
Review this list of countermeasures against fraud. Put into place each and every one that you can, and then be constantly on the alert. There is more to this than just a camera over the parts counter. Fraud happens, and the next victim could be you.
Hal Ethington has been associated with the powersports industry for more than 30 years. Ethington is a senior analyst at ADP Lightspeed. He can be reached at Hal_ethington@adp.com.