Avoid Conspiracies to Commit Fraud in a Down Economy

While the Great Recession rages on, dealerships are finding out the hard way that dealership fraud runs rampant during downward trends in the economy. According to Bernard Boule, who has developed products for auto retail for 20 years, theft costs dealerships $9 per employee per day. This amounts to $280,000 a year for dealers with 100 employees. Dealerships most vulnerable to this type of theft are those with fewer than 100 employees. Fifty percent of all dealers experienced theft during a five-year period during the ‘90s, growing at 5 percent annually. With these statistics, the sobering fact is most dealers can expect to be victimized by theft of some type every year. In short, now is the time to prevent fraud in your dealership. It isn’t getting better out there.

The Three-Legged Stool of Deception
If an active dealership has few checks and balances associated with the circulation of money and assets, thefts are more likely to occur. According to the Association of Certified Fraud Examiners, asset misappropriation accounts for more than 80 percent of offenses; in addition, most fraud is uncovered only as a result of tips and complaints from other employees.

According to Dr. Donald Cressey, a noted criminologist and researcher of embezzlers, there are three factors that cause employees to commit fraud. These factors must be present at the same time in order for an ordinary person to commit fraud. The three factors include:

• Pressure

• Opportunity

• Rationalization

Pressure
Cressey called the first side of the fraud triangle “pressure,” which is a perceived “non-shareable” financial need. Generally there is some financial problem that is insoluble through legal earnings. Examples of pressures that commonly lead to fraud include:

• Inability to pay one's bills

• Drug or gambling addiction

• Desire for status symbols such as a bigger house, nicer car, etc.

Non-shareable problems all involve some sort of embarrassment, shame or disgrace. More importantly, they all threaten the fraudster's status as a person who is trusted by others.

Opportunity
The person must perceive a low-risk opportunity where they can use their position of trust to solve their financial problem in secret, in such a way that the crime itself will not be detected. For example, if an employee has access to blank checks and also reconciles the company's bank statement there is an opportunity to forge a company check. When the bank statement arrives, they can destroy the fraudulent check and force the balance on the reconciliation.

Rationalization
People who commit fraud are generally first-time offenders who do not view themselves as criminals. They tend to perceive themselves as honest people caught in a dire situation. They rationalize fraud to make it a justifiable act. Examples of rationalizations include:

• I was only borrowing the money.

• I was underpaid; my employer had cheated me.

• My employer is dishonest to others and deserved to be fleeced.

While the perpetrator rationalizes the crime prior to the incident, the rationalization is often discarded after the act.

The takeaway from the fraud triangle is that all three factors must be present for fraud to occur. If any of the three elements is missing, fraud will generally not occur. The dealer’s job then is to make sure that at least one leg of the three-legged stool of deception is broken.

Since the fraud triangle provides an outline for deterring fraud, dealerships need to institute prevention programs that address the problem areas employees look hard at when considering theft. Effective deterrence will target the three elements of the fraud triangle.

1. Reduce pressures on employees that might push them into committing fraud.

2. Reduce perceived opportunities to commit fraud.

3. Dispel rationalizations for engaging in fraudulent conduct.

You do this by applying a process-based approach to fraud prevention.

The Fraud Prevention Process
1. Adopt a Fraud Policy

2. Distribute it to all employees.

3. Train and assess their understanding.

4. Enable anonymous reporting and investigate incidents.

5. Enforce the policy consistently across your entire dealership.

6. Manage those who do not execute the policy and training.

There are compliance programs in the industry to help you create and document these items. Dealers need to establish a comprehensive process that ensures fraud does not occur in their dealerships.