How to Identify and Stop Internal Theft
in the Dealership!
Failing to be alert for employee schemes to embezzle or
otherwise steal from the dealership can be not only costly It's embarrassing!
With
Jodi Kippe, CPA & Partner
Retail Dealer Practice at Crowe Horwath LLP
Moderated by
Mike Bowers, Executive Editor at DealersEdge
Thursday, June 14, 2012
1-2 pm ET
Jodi Kippe, CPA & Partner
Retail Dealer Practice at Crowe Horwath LLP
Jodi Kippe is with Crowe Horwath and Company LLC, a top 10
public accounting, and consulting firm. Jodi is a CPA with over
20 years experience working exclusively with Crowe’s Retail
Dealer group that specializes in assurance, tax, financial advisory,
risk management, and performance consulting to dealerships. She
has lectured at NADA and AICPA conferences, and is a published
writer, with articles featured in trade magazines, periodicals, and
business journals.
Professional Activities and Certifications
· American Institute of Certified Public Accountants
· Florida Institute of CPA’s
· Crowe Chizek’s CFO Roundtable, Moderator
· SunTrust’s Commercial Dealer Services Advisory Board
· Women’s Automotive Association International, Member
· Frequent speaker at various industry groups and trade associations.
· Contributor to articles published in various trade magazines, periodicals
& business journals, including NADA’s AutoExec magazine.
Education
· B.S.B.A. in Accounting, Central Michigan University
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Internal Controls - Key for Mitigating Theft Risk
Jodi Kippe, Partner
Audit
Crowe Horwath LLP - Retail Dealers
The Unique Alternative to the Big Four®
Presenter
Jodi Kippe – Audit, Crowe’s Retail Dealer practice
More than 25 years experience in providing audit, risk, financial advisory,
and performance consulting services for retail dealerships
Consults with large dealership groups on centralized accounting, policy
and procedures manual and internal audit function
A published writer, with articles featured in trade magazines, periodicals,
and business journals on many aspects of dealership operations
A CPA, and member of the American Institute of Certified Public
Accountants (AICPA) as well as Florida Institute of CPA’s
Audit | Tax | Advisory | Risk | Performance
© 2012 Crowe Horwath LLP
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The Perfect Storm for Fraud
The current economic environment has created the
Perfect Storm for Fraud!
Pressure
Opportunity
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Rationalization
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The Perfect Storm for Fraud
Pressure
Reduced income
Medical or other bills
Expensive tastes
Addiction problems
Opportunity (dealership management has most control)
Weak internal controls
Reduced employee counts
Poor management oversight
Rationalization
“Borrowing” and fully intends to pay back
Job dissatisfaction – therefore something is owed to him/her
Justified to save family, home, car, etc.
Doesn’t understand or doesn’t care about consequences of their action
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The Unique Alternative to the Big Four®
2008 CFE Fraud Statistics
In 2008, 7% of US GDP, or $994 billion, was lost to fraud
Over half of the fraud caused losses of at least $100,000
Fraud is costly – the median fraud was $175,000 with one-quarter
losses at least $1 million
Lack of adequate internal controls was most commonly cited as the
factor that allowed fraud to occur
Occupational fraudsters are generally first-time offenders
Source: ACFE’s 2008 Report to the Nation on Occupational Fraud and Abuse
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Alarming Statistics
Approximately 33% of reported frauds involved 2 or more people:
median loss was 6 times greater in the case of collusion;
median loss was 8 times greater in the case of collusion of managers and
employees
Average scheme existed for 18 months before detected
9 of 10 asset misappropriations involve CASH
Fraudulent disbursements…71%
Skimming (before it’s recorded)…32%
Cash larceny (after it’s recorded)…9%
Source: 2002 ACFE’s Report to the Nation on Occupational Fraud and Abuse
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More Alarming Statistics
When?
Frauds by perpetrators living beyond their means: 39%
Frauds by perpetrators experiencing financial difficulty at the time of the fraud:
34% (Do you think these conditions exist today?)
Fraudsters with “wheeler-dealer” mentality: 20%
Fraudster unwilling to share duties: 19%
How?
Corporate-fraud victims that blamed lack of adequate controls: 35%
Thou Shalt Not Commit Fraud – Employees can resist everything but temptation – CFO.com
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More Alarming Statistics
Who?
Frauds by persons in the accounting department: 29%
Frauds by executives or upper management: 18%
People 41-50 years old: 35%
People with the organization > 5 years: 52%
People with income < $50,000: 40%
How were they caught?
Frauds exposed by whistle-blowers: 46% (Do you have a system in place?)
Thou Shalt Not Commit Fraud – Employees can resist everything but temptation – CFO.com
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Do you want to wait?
What happens afterward?
Companies that modified controls after fraud was detected: 78%
Do you want to wait for
this to happen to your dealership??
Thou Shalt Not Commit Fraud – Employees can resist everything but temptation – CFO.com
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Internal Controls - Key for Mitigating Theft Risk
Internal Controls Analysis:
Dealership management should review their internal controls periodically,
looking for:
Areas for improvement,
Identification of weaknesses; and
Adapt to changes in structure, operations or market which may necessitate
new controls.
Review for segregation of duties
Break it into specific accounting areas for a more manageable and
effective analysis
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Segregation of Duties Review
Person reconciling bank account(s) doesn’t have other bank account
responsibilities such as check signing authority
Check signer doesn’t make bank deposits
Accounts payable clerk doesn’t mail checks or have access to cash
receipts
Accounts receivable clerk doesn’t receipt cash or write off receivables
Controller/office manager isn’t the DMS administrator
Parts personnel don’t complete parts cycle counts or parts physical
General journal entry computer access is limited to few very; maybe one
person to enter all journal entries
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Internal Controls - Key for Mitigating Theft Risk
Review Internal Controls - key accounting areas for analysis:
Cash Disbursements
Cash Receipts
General Journal Entries
Payroll
Parts and Inventory Sales
Vehicle Inventory and Sales
Service Sales
Body Shop
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Cash Disbursement Example Questions
Bank general ledger account(s) are reconciled to bank
statements on a timely basis (daily, weekly or
monthly depending on volume of activity)?
Is “Positive Pay” feature in place with the dealership's bank?
Wire transfers:
Is “Block and Filter” feature in place with the dealership’s bank?
Is documented approval required before the wire is executed?
Are call back procedures used to validate the authenticity of the person
requesting the wire?
Are phone requests accepted only for those customers for whom the Bank
has a completed wire transfer agreement on file and a PIN or pre-authorized
code has been assigned?
Audit | Tax | Advisory | Risk | Performance
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Cash Disbursement Example Questions
Signature authority over bank account(s) (including authority to transfer
funds among accounts and process EFTs) is restricted to management
personnel not responsible for recording cash disbursements or
reconciling bank account(s)?
Vendor invoices are processed by Accounts Payable Clerk(s) who is
(are) independent of purchasing, receiving and cash functions (not an
authorized check signer or not responsible for posting of cash receipts)?
Statements received from suppliers and service providers are reconciled
to the A/P ledger prior to submitting for payment, and differences are
investigated? Reconciliations are retained and signed off by preparer
and reviewer?
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Cash Disbursement Example Questions
Signed checks are mailed by employees who are independent of
disbursements and accounts payable functions?
Are voided checks retained and filed numerically with all other check
copies and all voided checks recorded in the computer system
immediately?
Is an approved vendor list utilized?
Does the CFO or Controller analytically review monthly expenses which
may include a comparison to budget, prior month and “same month –
prior year” to identify significant variations?
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Cash Receipts Example Questions
Are all checks restrictively endorsed immediately upon receipt?
Is a remote deposit service utilized for depositing checks?
If manual receipt books are utilized, are they reconciled to the system
generated cash receipts by someone independent?
Is access to credit card machines limited?
Do individuals handling cash post general journal entries?
Is the cash clearing account zeroed (reconciled) daily?
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General Journal Entries Example Questions
Are paper journal entry vouchers used? If yes:
Vouchers are signed by preparer?
Vouchers are signed by approver?
Vouchers require a description?
Vouchers require supporting documentation?
Journal entries impacting the departments approved by the
respective manager?
Is a data entry stamp utilized?
Are all journal entries approved by the Controller? Are journal
entries made by the Controller reviewed?
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General Journal Entries Example Questions
Is the preparation of journal entries limited to accounting personnel
only?
Is access to post journal entries reviewed periodically?
Are EFT/ACH transactions recorded though the general journal?
Are there more than 50 journal entries prepared per month?
Is the general journal reviewed monthly by the Controller with all
entries agreed to manual journal entry vouchers?
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Payroll Example Questions
Is access to the payroll master file limited to the Payroll Clerk and the
highest-ranking accounting person (i.e. CFO) in the accounting
department?
Is the processing of payroll limited to one person in the accounting
department?
Does someone other than the person processing payroll distribute
payroll checks/direct deposit advices?
Does the Controller complete an analysis of top compensated
employees per payroll register/Form W-2’s as well as compute federal
and state income tax withholdings as a percentage of gross wages
and provide to dealer for review?
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Parts and Inventory Sales Example Questions
Are credit memos approved by the Parts Manager with the part being
returned inspected?
Are voided parts invoices approved by the Parts Manager? If not, does
the Parts Manager review the voided parts report?
Are parts overrides limited to the Parts Manager? If not, does the
Parts Manager review the override report?
Are parts inventory cycle counts performed by someone independent
of the parts department?
e.g. Looking to spot check accuracy of the parts bin – knowing that
someone is looking creates a deterrent.
Is the parts pad reconciled to the general ledger by someone in the
accounting department or the Parts Manager and reviewed by
Controller?
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Vehicle Inventory and Sales Example Questions
Are periodic physical inventories of new and used vehicles taken and
reconciled to the general ledger with difference resolved timely?
Are physical inventories for new and used vehicles traced to MSO’s or
titles?
Are adjustments to deals approved only by the General Manager,
Sales Manager or Controller?
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Service Sales Example Questions
Is the approval of granting credit to customers limited to accounting
personnel only?
Does the dealership schedule work-in process (WIP) by matching
technician’s time to repair order controlled by R.O.s number?
Are approval of adjustments to work-in-process accounts limited to the
Service Manager only?
Does the Service Manager periodically review the open repair order
report?
Are voided repair orders approved by the Service Manager? If not,
does the Service Manager review the voided repair order report?
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Body Shop Example Questions
Is the closing of repair orders limited to the cashier only?
When a physical inventory of the body shop materials is taken, is
it taken by someone outside the Body Shop Department? Are
significant variance followed up timely?
Do policy adjustments require Body Shop Manager approval?
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Internal Control Analysis
Perform an internal control self-diagnostic to assess your risk level
in each of the key areas (Crowe CARD)
Have different personnel complete to identify differences in the
understanding of your dealership’s internal controls
Based on answers a gauge assessment is provided in each area:
Green - No identified significant weakness;
Yellow - Identified potential weakness;
Red - Identified weakness.
Based on your assessment – take action
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Summarized Results
Each area is measured with a gauge:
Green – No identified significant weakness;
Yellow – Identified potential weakness;
Red – Identified weakness.
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Develop Your Plan
Red or Yellow
Prioritize your weaknesses that you want to address
Develop and implement your remediation plan to address those weaknesses;
Ensure that you have a timeline for completion
Green
Develop your testing plan for the areas not identified as weak
Again, ensure that you have timeline for completion
Inspect What You Expect!
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Would you find value in having a further conversation?
Jodi Kippe, CPA, Partner
Crowe Horwath LLP
Tel 954.489.4742
[email protected]
For information on the issues critical to
dealership accounting and operations:
subscribe to Dealership Flash at
www.crowehorwath.com/dealer
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other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or
any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member
of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance
specific to your organization from qualified advisers in your jurisdiction. © 2012 Crowe Horwath LLP
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