It was an expensive lesson for California auto dealer Danny McKenna. He found that two of his most trusted employees had systematically drained $600,000 from his five dealerships.
The guilty parties "had been there a long time and had earned this immense trust," McKenna told Automotive News. "Now I don't dog-pile all this trust on one person all the time anymore."
McKenna's losses could have been even more catastrophic. One of the co-conspirators, who worked in McKenna's accounting department, had taken a medical leave. It was only then that a temporary employee uncovered the fraud, which had gone undetected for years.
Auto dealers everywhere should heed the lessons that McKenna learned the hard way. As a small-business owner, you want to build an atmosphere of mutual trust with your employees. But while it might seem counterintuitive, the best way to accomplish this is to outsource your bank reconciliations — if not all of your accounting and bookkeeping services.
Detection and Deterrence
Regular bank reconciliations performed by an outside firm can not only detect fraud that has already occurred, but also deter future fraud.
With their high annual turnover rate — a recent study pegs it at 39.4% industry-wide — auto dealerships are particularly susceptible to fraud and outright theft. One survey found that 88% of dealership fraud was committed by first-time perpetrators. Moreover, up to 40% of employees could be tempted to commit fraud if they thought they could get away with it, according to the same survey. An employee who knows a third-party reconciliation is coming, however, will be less likely to try to cook the books.
Beyond the obvious benefit of saving you money, keeping your employees honest helps maintain morale. McKenna says that the fraud he experienced "affected everyone's life" at the dealership and "was awful." He now uses certified third-party auditors.
Another benefit of third-party reconciliations is that they can uncover irregularities resulting from honest mistakes or faulty practices. That can keep you from casting a suspicious eye on an innocent employee and promote a healthier working relationship. It can also help you streamline procedures and eliminate inefficiencies.
Spreading out the Responsibilities
With multiple streams of debits and credits, auto dealerships can be an accounting nightmare. New cars, used cars, leased cars and loaners all require separate bookkeeping. Most dealerships also have a parts-and-service department, with fluctuating inventory and multiple vendors. A dishonest employee who knows the system can easily play a shell game with your money.
Industry experts recommend dividing accounting responsibilities and building in crosschecks and redundancies to avoid concentrating too much responsibility — and too much information — in one person's hands. It's a simple safeguard against fraud. In addition, a distribution of responsibilities keeps a dealer from being left high and dry if a key accounting employee leaves or has an extended absence.
Cash flow is the lifeblood of any business. For some auto dealerships, the best way to monitor that lifeblood is to use a third-party accounting service. At the very least, a conscientious auto dealer should perform monthly bank reconciliations, according to the Houston Chronicle. "When bank statements are not monitored and reconciled, the potential for undetected loss is high," the Chronicle reports. "Keeping an eye on bank statements can help you keep your finger on the pulse of your company."