A study conducted in 2006 by the Association of Certified Fraud Examiners (ACFE) revealed that 87.9% of perpetrators of fraud have never been charged or convicted of a felony. In addition, the ACFE found that 36.8% of frauds occur in private companies, and 36% of frauds happen in companies with fewer than one hundred employees. While receiving a tip is the manner in which most fraud is caught (34.2%), internal audit and internal controls in aggregate are by far the most effective way to prevent and detect fraud (39.4%). A common theme amongst companies with instances of fraud is that they do not have the resources (time, money, employees) to prevent or detect fraud though the use of internal controls. However, there are several inexpensive actions a company can take to minimize the risk of fraud due to theft, since it is much easier and more cost effective to prevent a fraud than to detect it later.

As small businesses, many dealerships do not have a large enough staff in place to sufficiently segregate duties of employees. The easiest and most effective way to combat this is with management oversight; having someone else involved in any process makes it much more difficult to commit fraud.

Checks should always be signed by someone other than the person writing them, and bank statements and reconciliations should be reviewed every month for suspicious activity. In addition, vendor statements, finance reserves, and other statements should be reconciled to the company’s records on a monthly basis and reviewed. Many fraudulent transactions are covered up or promulgated using adjusting journal entries. Therefore, use of journal entries to post transactions should be limited, all manual journal entries should be reviewed, and a purpose should be identified for each entry. Employees should be made aware that the procedures are in place, and their work is being reviewed thoroughly and regularly. While this may add a few hours per month to the closing process for office managers and owners, the benefit of reviewing the information is tremendous. Not only does it give the company a chance to detect fraud, it also ensures that the company’s records are maintained accurately, before problems become too unwieldy.

Another inexpensive way to prevent fraud is to ensure that all customers receive invoices for all goods and services, no matter how inexpensive the part or service. The invoice should contain not only the price of the product or service, but the quantity of the product or service given. Customers should be informed that they should expect a receipt for every sale. The most effective control is one involving a third party. Also, people with the responsibility for the ordering of assets should not also be responsible for the receipt of the assets. This can best be seen during ordering and receiving of parts: the employee who places orders for parts should not be the same one who receives the parts, verifies that they are present and enters them into the system.

By taking small precautions during everyday tasks within a dealership, the company can protect itself from unnecessary losses due to employee theft.

Our website has been refurbished. Please visit our new website at www.downeycocpa.com.