Employee Theft in Car Dealerships on the Rise

Car dealerships are facing rising levels of theft among employees. This is fueled by multiple factors, including economic pressures, technological vulnerabilities, and internal control weaknesses. Fortunately for dealers, by viewing these factors through the Fraud Triangle Theory, there are practical steps you can take to lessen your risk of loss. This article explores the key factors contributing to this rise in theft and outlines practical steps to protect the dealership.

Factors Contributing to Rising Theft in Dealerships

1.       Economic Conditions

The past few years have seen us on a roller coaster of inflation versus wage increases. In many sectors wage increases have not kept up with inflation and cost-of-living increases. Employees struggling to meet daily needs face tremendous pressure. This pressure has contributed to rising personal debt, further compounding the problem with higher interest rates. Many turn to fraud, rationalizing it as a necessary or temporary means of survival.

2.       Technology and Increased Access to Data

Technology is constantly changing the dealership landscape with tools promising to increase competitiveness by giving greater access to information, decreasing costs, or otherwise improving productivity. However, large amounts of easily accessed data (and sometimes as easily manipulated) have also increased opportunities for fraud, both externally and internally.  One example involves a salesperson who, in just four months, reportedly purchased and took possession of 14 vehicles using fraudulent loans with stolen identities.  This case, pending litigation, reports a $1.5 million loss to the dealership and banks.

3.       Weak Internal Controls

Historically, many dealerships have prioritized trust over structured internal controls. This often fails. A recent first-hand survey of dealership managers in the sales, service and parts departments revealed that fraud awareness is lacking. More specific questions about processes and detection indicated an over-reliance on intuition instead of proper controls, with responses such as “we’d know it if it were happening here.”

4.       High Employee Turnover

Employee turnover in car dealerships for 2024 is around 34%. This high turnover creates several issues that increase fraud risk:

• Inexperienced staff – new employees may lack the training and awareness to fully execute company policies and procedures and may be more prone to errors. Both can lead to inadvertently opening doors for fraud. Inexperienced staff may also be more prone to follow poor guidance from others.
• Weakened employee loyalty – high turnover can weaken loyalty from remaining staff who may feel overworked. These less-engaged employees may lose the motivation to act in the company’s best interests.
• Increased costs and process gaps – prolonged turnover significantly raises the costs of hiring and training. This can lead to compromises in other processes, skipping steps like background checks, or diverting funds from other training and fraud detection areas. For example, a dealership recently experienced a nearly $2 million loss due to theft by an employee with a history of fraud - which may have been avoided with a background check.

Leveraging the Fraud Triangle to Reduce Risk of Loss

The Fraud Triangle Theory says that three factors usually exist to create fraud: pressure, opportunity and rationalization. While dealers can’t control external pressures such as inflation and cost-of-living, they can focus on minimizing opportunity and rationalization.

Practical Actions to Limit Opportunity

• ‍Enhance internal controls –ensure strong controls exist for cash handling, inventory management, expense approval, and transaction authorization. Routine audits, process walkthroughs, written processes, segregation of duties, and reconciliations will also reduce opportunities for fraud.‍
• Implement Employee Training and Awareness – fraud awareness training is essential to building a culture of integrity. Teach employees what constitutes fraud and how to recognize and report suspicious activities.‍
• “Inspect what you expect” – accountability is key. Conduct routine or surprise checks on high-risk areas to encourage consistency and identify areas where additional guidance or adjustment is needed. A CPA firm specializing in auto dealerships and internal control can offer suggestions and help set up processes to reinforce accountability.

Reducing Rationalization Factors

• ‍Ensure Fair Compensation - employees who feel underpaid or undervalued are more likely to justify theft as deserved. There are many resources available to aid in comparing pay within the auto industry.‍
• Enforce Policies Consistently Across All Levels – inconsistent application of rules can foster resentment. Fair and consistent policy enforcement discourages employees from viewing theft as a way to “even the score.”‍
• Promote an Ethical Culture - employees are less likely to rationalize theft if they view the company as an ethical organization. Emphasize ethics and transparency and provide a safe way for employees to express concerns or report questionable behavior.

Dealerships are facing pressures that increase the risk of theft among employees. This pressure left unanswered increases the risk of fraud. However, by understanding the Fraud Triangle Theory and responding to both the opportunity and rationalization factors, dealers have tools to create a more secure and ethical workplace. Proactive strategies, from enhanced internal controls to employee training, are crucial for dealerships now and in our ever-changing environment.

For assistance or further discussion on implementing fraud prevention, dealers and dealership managers can contact HHM’s team of dealership focused professionals, CPAs, and Certified Fraud Examiners.