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Dealership Accounting Update: Would you put a wolf in front of the hen house?

BY FORREST FLINN

Would you put a wolf in front of the hen house?  Then why would you put one in charge of your dealership?  Fraud and theft in business is at an all-time high and according to Fortune Magazine, the US leads the world in internal retail theft.  (Fortune.com) You might think powersports is different but we are, in fact, a retail business.  We are subject to the same opportunites and threats as our big box cousins and we need to make sure that we are constantly working our dealership’s internal controls.

This month, I am going to present three simple internal controls that you can implement easily. The first will be an accounting internal control that protects cash.  The second will be in the parts department to make sure that inventory isn’t flying out the back door!  The third will be in the service department where I can show you how to keep employees from giving away profit by stealing cash.

  1. Cash is King.  Cash is the most elusive asset that we have to protect in the dealership.  Cash is so easy to embezzle from a dealership if you do not have certain internal controls in place.

In many dealerships we have to wear many hats but in some instances where cash is concerned there has to be oversight! Many dealerships have their office managers or accountants perform the daily deposit, sign checks, and reconcile the monthly bank statement.  This is a direct violation separation of duties which is a major internal control on cash. In the powersports industry I see where too many office managers are doing it all and it makes me cringe to say the least.

The easiest internal control you can implement to protect cash is to redesign the job where the office manager is not doing the deposit and reconciling checking account.  There is too much opportunity here for theft.  Also, I strongly suggest that you have a copy of the bank statement for the dealership sent to your home.  A lot of successful dealers do this and go over it with a fine tooth comb.

And finally, you should never have the person preparing the check sign the check. These functions should be separated as well.  It is a simple but effective control to deter someone from issuing checks fraudulently.

  1. Service with a smile!  A few years ago a client dealer I know found out that an employee in the service department had a personal credit card chip reader on his smart phone and was processing repair orders for the dealership!  The customer was unaware and accounting was unaware.  This went on for some time until a customer complaint revealed the scheme.

How did this happen?  Well after the employee took the customer’s credit card on his smart phone, he then removed customer information on the repair order and then voided it in their dealer management system!

How could this have been prevented?  Well it is simple.  The dealer should have given nobody access to void a repair order except for accounting and or the owner.  Because the employee erased customer information the dealer was unable to tell what customers were affected.  Because of this their insurance company denied a $15,000 claim.

  1. Are your parts walking out the back door? We never want to think that our guys and gals in the parts department would steal from us but think again!  According to one study 30% of all inventory shrinkage was due to employee theft/dishonesty.  (LPInsider.com) What that means is 30% of your missing inventory is being stolen by your employees!  And if you take into consideration that we are a lifestyle industry that number could even be more!

How can you as a dealer deter and prevent internal employee theft in the parts department?  Well first I suggest that all employees come in and out through centralized doors.  In many dealerships employees come in and out of many entrances which encourages theft to begin with.  Management can watch one entrance more effectively than many doors scattered throughout the dealership.

Another way to deter employee theft in the parts department is to look at your “internal accounts receivable accounts” more closely.  Whenever you hear someone say bill it to sales, parts, or service your radar should go up.  Related to this is giving everyone the ability to adjust on hand quantities in their dealer management systems.  This should be locked down tightly.  The easiest way to steal from a dealer is just to adjust on hand quantities downward and move the inventory out the back door!

As you can see, the internal controls in each department that I have discussed are relatively easy to implement, test, and manage.  Yes, implementing new processes and procedures in a dealership may cause employees to complain.  This should not deter you from implementing the new change/changes.  It is often the employee that complains the loudest is the one that you need to watch closer.

If I were a dealer principal today, I would implement every internal control I could to protect the dealership I own.  There is an old saying that an ounce of prevention is worth a pound of cure and it holds true in dealerships today.  I have seen many things over the years and most frauds and embezzlements could have been prevented with sound internal controls.

And remember, after all it’s just good business.

Forrest Flinn, MBA, PHR, SMS has been in the motorcycle industry for more than 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.

Contact: forrest@powersportsmc.com

2 comments

  1. Spot-on Forrest! During my years as a DSM, embezzlement was among the largest causes of dealership failures. Simple controls such as those you suggest would have prevented most of these. Keep up the good work.

  2. What concerns me is the shear number of dealers out there that are vulnerable. In my experience Steve, a dealer will not do any of the things I suggest until after they become a victim. Sad but true.

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