Get Control Of Internal Controls

You can't control external factors that affect your dealership, such as the economy and industry trends. But internal controls are well within your reach. Internal controls are the policies and procedures dealers employ to protect assets, improve operating efficiency and ensure reliable financial reporting. They also are your first line of defense against theft and fraud.

Don't give "family" free rein

It's common for dealers to adopt a not-in-my-backyard attitude toward internal controls. They presume resources are spread too thin and employees are too closely knit to justify a formal control system.

"We were like a family," recounts Bob, a dealer-owner who filed for bankruptcy last winter. He and his former best friend, Rob, jointly owned six dealerships in a large metropolitan market.

For more than a decade, Bob overlooked his partner's lavish spending habits, which included season tickets to the local NFL team and country club dues. Rob also wrote off a home remodel, including it as part of the company's new showroom. His over-the-top spending didn't stop when the market softened, precipitating the bankruptcy claim.

But tighter controls might have curbed Rob's spending. For instance, the partners could have reviewed each other's expense reports. Or the checking account could have required two signatures for checks over, say, $10,000.

The control environment starts at the top. When employees see that management is overriding internal controls and "borrowing" dealership assets for their personal use, they're more likely to view fraud as acceptable and attempt it themselves.

Protect your assets
Internal controls needn't be time-consuming, expensive or offensive to trusted employees. Start by brainstorming potential fraud risk areas and potential fixes, including:

Inventory. Inventory is a dealer's biggest, most desirable asset. Set a good example by refraining from keeping dealership vehicles in your home garage. Lock the parts and accessories inventory and keep it tidy. Conduct monthly or quarterly inventory counts to compare what the computer says vs. your personal observations. Identify slow-moving items; discount them for a quicker turnover or return them to the manufacturer, if possible. Frequently reconcile your physical inventory of vehicles to your floor plan documents.

Customer lists. These belong to the dealership, not your salespeople. Protect electronic databases with passwords that change on a monthly basis. When salespeople leave, don't allow them to take valuable customer data with them. It could come back to haunt you if they join one of your competitors.

Cash. The majority of fraud schemes involve cash. So, keep petty cash in a safe, not the receptionist's desk drawer. Ask your CFO for the original copy of the bank statement and review the bank statement every month. And don't forget segregation of duties - the key principle of internal control. For example, don't allow one person to handle both the cash receipts and the accounting records.

Also double-check your invoices against contract prices. One dealer discovered that a third-party installer of aftermarket leather seats and sunroofs had been overcharging for parts and labor. The dealership's service manager and the vendor's CFO split the difference between actual and invoice prices using phony return memos.

Let auditors do the legwork

Reinforcing your internal controls may seem like a daunting task. You may wonder where to begin and how to achieve the biggest bang for your buck. Your CPA can help guide you through the process of implementing cost-effective internal controls. He or she also can identify accounts at risk for "material misstatement" through the audit process.