Be Ready For Fraud

Almost every month, at a minimum, I hear about a theft or possible theft at a dealership. I get depressed each time I get the call. As a CPA and certified fraud examiner (CFE), I know about trust. Dealers have quite a bit of trust in the personnel in their dealerships. They have to. They can’t do everything themselves.

With this in mind, what do you do to protect your dealership from theft? You actually can do quite a bit. One of the first things you need to do is to go into your office, shut your door, get a pad of paper and a pencil, and physically write down the top 10 ways you would steal from yourself if you were an employee. Don’t tell me you can’t come up with at least 10 ways.

Once you have accomplished this, review the list and prioritize them in the order of where you are the most vulnerable. Once you have this list, you can start to review your potential for theft. I hope one of the first things you wrote down is cash. Cash is king. It rules your business. Without it, you fail. Have you gotten the point yet?

One of the things you need to check on cash controls is whether the daily cash received is actually making it to your bank account. You can easily check this yourself one day by being there when your cashiers check out for the day. Sit with them while they finish the day, count the money and make up the deposit slip. See what reports from your system they are using to match up the cash, credit cards, money orders, checks, etc., collected for the day. After this is completed, make sure the deposit is taken to the bank, and then compare the deposit slip you made out to the deposit receipt from the bank. All of these things – the deposit slip copy, your bank receipt, credit card total slip and the deposit report from your system – should be matched up daily and stapled together.

Another cash item to check is whether your bank statement is being reconciled monthly. This is the procedure we see not being completed timely, and sometimes not done at all. How can your cash be right and the rest of your financial statement be correct if all the cash is not recorded or is recorded incorrectly? Ask whoever is completing your bank reconciliation to sit down with you and review the latest month completed. If the latest month end is not completed, you’d better find out why, and demand that the bank reconciliation is the first thing completed as soon as the month ends. With online banking, you could easily reconcile your account daily if you wanted. There is no excuse for it not to be the first thing completed after month end.

Whenever we see bank reconciliations not being completed timely, it scares us to no end. Whenever we see that the bank reconciliation includes many adjustments, and then we see these adjustments not being recorded, it also scares us. What also bothers us is whenever we see the bank reconciliation reconciled to a balance which is not the general ledger balance at month end. We have seen many bank reconciliations where the balance arrived at matches nothing. How can this be? I have even had to argue profusely with some office managers about the correct way to reconcile a bank account. I show them that if they just turn over the bank statement sent to them, there is a formatted bank statement to follow. This format takes them from the bank balance to the general ledger balance they should have.

When you go back to prior month ends and review if the reconciled bank balance agrees with your month end balance on the general ledger, don’t be surprised if it doesn’t. We see it all the time. This is due to recording the adjustments, bank charges, actual cash activity, etc., in a different month than when it happened. This is normally due to the bank reconciliation being completed after everything else for month end is completed and the month is closed. This is unacceptable.

The next thing you should do with the bank reconciliation, if prepared manually or with a spreadsheet, is to sit with a calculator and start checking the subtotals of deposits and outstanding checks and the actual bank balance to the general ledger balance reconciliation. Just because it looks pretty and neat, or was completed on a spreadsheet, doesn’t mean it actually adds up correctly. Spreadsheets can have incorrect formulas, which compute wrong results.

The next thing you need to do is to take a general ledger detail printout of your cash account for a month and then actually check this against the bank statements you have received to see if the check numbers and amounts match. This seems fairly simple, but it can show you a few things. First, is the amount posted to your general ledger system what cleared the bank? Second, did it clear fairly timely after the check was written? Third, does the check number match your system-generated check number on your general ledger detail cash report? Did you see each check and actually sign it? We have found many times these simple things don’t match up.

How do you know you signed all the checks? You just know you have signed the ones presented to you. You have not seen the checks not presented to you, but they may have cleared the bank. Surprise! Oh, I forgot, you require two signatures for each check. Give me a break! All I have to do is to forge the second signature. The bank doesn’t check for the signature. I have seen many checks clear the bank which have no signatures. Amazing! Don’t rely on the bank to be your only internal control.

You should be getting the bank statement at home, so you can review it before anyone else. You should also be reviewing your activity online throughout the month. You can print off a list of check numbers to be used in the future and then check them off as you sign the checks. At least you can have some control to determine if you actually see all the checks.

These are the basics you need to start with. There are still many things to check on cash (electronic transfers, wire transfers, ACH activity, etc.). Wow, this is a lot of work! Yes, it is, but your business depends on it. Let your employees know you are checking them and their work. It will help prevent fraud from happening. It may not stop it, but at least you may catch it more quickly. Good luck!

Vol. 9, Issue 6