The Association of Certified Fraud Examiners reports that fraud and abuse costs employers an average of $9 per day per employee, ringing up a daunting total of more than $400 billion each year. According to the ACFE, small businesses with less than 100 employees, including many auto dealerships, are most vulnerable.

Experts say that every dealer can expect at least one incident of theft each year. For the five-year period ending in 1993, 50 percent of all dealers experienced theft, and that number has been increasing at an annual rate of 5 percent. It’s been reported that 80 percent of all dealership employees engaged in some theft at work in the last five years.

How Does it Happen?

Employee fraud and theft are mostly likely to occur in departments with cash or easily liquidated assets, such as the parts department. The risk of loss is even greater if poor, or no, internal controls are in place. A couple of examples illustrate the danger.

Example 1

A dealer suffered a theft of $200,000 perpetrated by its general manager. The GM opened the incoming mail, pulling out miscellaneous checks that weren’t receivables, such as payments of F&I reserves or refund checks. The GM was also responsible for making deposits at the bank, many of which included cash as well as checks. The GM would pocket cash in the amount of checks he had previously pulled from the mail. Prior to making the deposit, he stamped those checks, added them to the deposit, and completed a new deposit slip reflecting the new breakdown between checks and cash. The deposit receipt thus reflected the original amount of the deposit, even while he was diverting dealer funds.

Example 2

A dealer that also operated a car rental operation was victimized by a manager who stole at least $98,000 over three years. The manager encouraged customers to pay cash for their rentals. She would then destroy the documentation related to the rental transaction, and keep the cash for herself. No system was in place that would reveal the missing forms. It’s also worth noting that the dealer’s insurance limit was only $25,000.

It Could Happen to You

Few dealers are immune to the danger of fraud, and the slowdown in the economy will only increase its incidence. In future issues, we’ll examine specific areas that may be susceptible to fraud and provide tips for prevention. In the meantime, one simple step is to ensure adequate insurance coverage — at least $500,000 — when employees handle cash.