FRAUD INVESTIGATION / FORENSICS
and the Need for Internal Audit
Principal, CPA, CIA, CFE
24 May 2017
During the course of my tenure as the Director of Forensic Accounting and Internal Audit, I have seen cases of fraud in all shapes and sizes victimize dealerships both large and small. From the $5,000 payroll fraud perpetrated by the payroll clerk to the $1.4 million fraud scheme perpetrated by the general manager, no dealership is exempt from exposure. Recently, we investigated two fraud schemes; the first was a fictitious vendor scheme perpetrated by the corporate controller of a multi-franchise group in the approximate amount of $700,000; and the second was a more complex scheme that involved the curbing of cars, among other malicious activities perpetrated by a general manager costing the dealership in excess of $500,000. In both situations, the dealerships had established controls to guard against these possible scenarios. However, since both dealerships were part of multi-franchise groups, it was difficult for upper management to ensure that all controls were operating effectively and efficiently, and as a result, control deficiencies were not identified in a timely manner. These scenarios exemplify the need for multi-franchise dealerships to implement some form of internal audit function which can be performed either internally or outsourced. However, the internal audit function that is performed internally should be done by employees completely independent of the function being tested.
An effective internal audit function should, at a minimum, include the following quarterly procedures:
- sample cash receipts and trace to the bank statement,
- sample test cash disbursements (checks and wire transfers) and trace to the supporting documentation,
- review the payroll register to confirm that all pay rates agree with the employees’ compensation plans, taxes and benefits are calculated accurately,
- review payroll records to ensure that vacation and sick time is applied in accordance with company policy,
- analyze vehicle sales history for employee purchases, customers with multiple purchases and any other unusual trends,
- perform deal jacket testing for the following procedures:
• trace contents of the deal jacket to the general ledger,
• ensure all required documents are present and comply with
federal privacy and truth in lending regulations as well as
• ensure that state sales tax is applied properly to all sales
- review all general journal entries for reasonableness,
- trace general journal entries to the signed journal vouchers,
- sample test repair orders for proper labor rates, parts pricing, discounting, flat rate hours paid to technicians and paperwork practices,
- review parts inventory reconciliation,
- perform parts bins check periodically throughout the year,
- verify that new and used vehicle physical inventory is performed monthly and reconciled to the general ledger,
- review accounting schedules and reconciliations,
- analyze accruals and reserves and other non-scheduled balance sheet accounts, and
- review the balance sheet and income statement.
Internal Audit functions should be performed on a regular basis to safeguard the dealership from a misappropriation of assets.
Certain functions should be performed on a monthly basis or periodically throughout the month, while others can be performed quarterly or annually. Additionally, management should establish an ethics compliance hotline. Management should communicate to the staff about its zero-tolerance policy for fraud, waste, and abuse and that any deviations should be reported to the dealership’s ethics
It should be noted that an internal audit function does not eliminate the risk of fraud, waste, and abuse. However, it will contribute to a culture in which management demonstrates a zero-tolerance attitude towards fraud. Additionally, studies show that the mere presence of internal audit testing serves as a deterrence of fraud.
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