Comments Off on Relying on accountants alone to detect fraud is a risky proposition.
By Phil Villegas
Several years ago, there was a great cartoon I came across from Leo Cullum. At the time it truly resonated with me since I was working with at a CPA firm and could clearly see firsthand the differences between “accounting” and “accountability”.
While most CPAs, will go to great lengths to tell their clients a reviewed or audited financial statement is not designed to uncover fraud, most dealers will simply hear the word “audit” and will get a false sense of security that all of their transactions are being analyzed.
For a CPA to provide an opinion on a financial statement, they need to ensure that it’s not materially misstated. The term “materiality” is a cornerstone of most engagements. Materiality is the maximum amount by which auditors believe a statement could be misstated, by [...]
Comments Off on At tax time, fraudulent federal withholding schemes may be on the rise.
By Marilou C. Vroman, CPA, CFE
On April 15th there tends to be some nervous energy around. It is Tax Day.
Whether you choose to file your tax return by April 15th or file for an extension, your personal tax obligation is still due on this day. Ever since my first real job and learning the rules of federal withholding, I was the one who thought that it was better to withhold a little extra along the way, than to get hit with a large tax bill and have to write a painful check. However, not all employees are so conservative and some, may go to any length to beat the system.
Dealership’s have a wide array of personnel with varying tax situations. From individuals claiming complete exemption from federal income tax withholding, to those who claim zero allowances and, well, let’s just go ahead and request some additional withholding while we are at it. [...]
Comments Off on Mid-Month Schedule and Operational Reports Check
By Phil Villegas
Our firm is in the business of internal controls, which in essence is the safeguarding our dealer’s assets. When we evaluate the internal controls of dealerships, we are primarily looking for weakness in the system that can lead to the dealership losing some of its assets, i.e., cash/profitability.
Internal controls at a dealership are not difficult, a little bit of common sense along with utilization of the DMS’ resources go a long way in safeguarding the dealership’s assets. Dealership internal controls are less about having a written and detailed list of operating procedures and more about having good oversight. When we encounter breakdowns in a store’s internal controls during our testing, it’s typically not because there wasn’t a system or process in place, but rather we find the breakdown is a human one. Individuals failing to do their job is not only the most common reason why internal controls break down, it [...]
Comments Off on The Hidden Gems in Exception Reports.
By Marilou C. Vroman, CPA, CFE
A recent article surfaced regarding a dealership embezzlement where a service department employee was allegedly taking cash collected from service customers for their service work and subsequently pocketing the funds. The scheme was perpetrated by manipulating the repair orders after the customer had paid for the work. The repair order would initially be customer pay, and once the funds were collected, the repair order would be changed to a warranty repair. At times, the VIN and actual repairs performed would be altered to create what appears to be a valid warranty claim in an attempt to recover the stolen funds from the manufacturer. We often see repair orders voided or labor hours discounted in order to cover up the theft of cash. In this case however, the employee likely realized the technicians still need to be paid for the hours flagged as per the original repair order and would [...]
Comments Off on Dealers should not always rely on reports being printed for them
By Phil Villegas
As internal auditors and forensic accountants, we always approach most operational and accounting reports with a degree of skepticism because we ultimately know the impact that human behavior can potentially have on these reports. To emphasize how important it is for us to know the reports and data we are looking at are pure and unaltered, it is standard protocol for us to require our clients to provide us system access in most of our engagements. We will seldom, if ever, rely solely on client reports if the reports have not been run by one of our associates. While this can often create increased workload for our team, it’s fundamental to what we do.
The recent story below, which is true will highlight the importance of this.
One of our analysts, who was not as well versed with the UCS as he is with other DMS systems, had requested a copy of [...]
Comments Off on Interpretation of the APA – as with healthcare, get a second opinion.
By Marilou Vroman, CPA, CFE
Buying a dealership can be an exciting and stressful proposition. Working with manufacturers, lenders, attorneys and accountants all in the interest of getting past the closing table to run your new automotive retail venture. Many of the hurdles of acquiring a dealership can be overcome, but one area that can create a significant amount of stress between buyer and seller is negotiation and interpretation of the asset purchase agreement (“APA”) which governs the sale of the dealership assets.
For those contemplating their first acquisition, the APA will typically highlight what will be purchased (e.g. inventories, fixed assets, goodwill etc.) and the method of valuation of each type of asset. The interpretation of the “what is being sold and for how much” can put a dealership transaction at risk if left until the date of closing to be discussed between buyer and seller. For example, an APA will typically include new [...]
“We go to war with the Army we have, not the Army we wished we had.” is the essence of a Donald Rumsfeld quote I use often in our dealership consulting practice.
It’s a common reality in our line of work we are presented with circumstances that can often seem less than ideal. Whether it’s a buy-sell due diligence, internal audit or a forensic investigation, we always seem to find our dealers put into a circumstance where items such as data, financials, personnel and/or documents are missing as part of the equation.
In certain circumstances this lack of necessary elements to solve the equation is completely innocent or unintended, these situations are relatively easy to adapt to. However, it’s when the necessary elements are intentionally or deceitfully withheld that leaves us questioning the missing items in much greater detail and with significantly higher levels of scrutiny than if we were simply [...]
Comments Off on Mysteries Within the Balance Sheet
By Marilou C. Vroman, CPA, CPE
Mysteries at the Museum – for those who have seen the show, you know everything has a back story. This is not so different from the amounts which reside on your dealership’s balance sheet. When was the last time you had a financial review meeting at your dealership and got a comfort level with your reported prepaid expenses, accounts payable or retained earnings? It’s likely you are thinking, well why on earth would we need to do this when I already pay someone to watch this for me? Let’s put our Pink Panther hats on for a moment.
Automotive retail is highly focused on departmental gross, PVRs, expenses and net income. Most performance targets and pay plans are based upon these items and the ability of personnel with control over these areas to keep them in check and maximize profits for the dealer. While profitability is key, we [...]
There are just some things in life that we don’t expect to be pleasant or enjoyable, like visiting a Dentist or getting audited. Then there are things that always leave me scratching my head as to why they become as painful as they do without need…like dealership Buy/Sell closings.
I’ve taken part in dozens of Buy/Sell closings, and while each transaction will have its own nuances, timelines and complexity, the issue that I have found to be at the core of the stress factor in closings rests on the “competitive gamesmanship”. It’s in this gamesmanship environment where individuals from each side of the transaction might try to “get one over” on the other side, regardless of how refined the terms of the asset purchase agreement are. Irrespective of the specificity and definitiveness of the terms or the language in the agreement, at the closing, the spirit and interpretation [...]
Comments Off on Enforcement and Awareness – Key Tips to Prevent Cash Theft
By Marilou C. Vroman, CPA, CFE
Yes, your dealership is at risk. Even the best run dealerships personnel with highest level of integrity can be victims of cash theft.
Cash theft is commonplace in dealerships due to high volume and high dollar value transactions. Cash theft is often perpetrated through a method known as accounts receivable lapping. This is a type of fraud used to conceal cash theft through the intentional manipulation of customer receivable accounts. The typical lapping scenario is when a customer’s payment has been diverted by a perpetrator and a different customer’s payment is used to cover the absence of the funds which were misappropriated. This type of fraud is often conducted in smaller dollar amounts which can accumulate to large amounts over time. These schemes are very difficult to detect in the ordinary course, especially if there is collusion between the perpetrator and an individual in the accounting office with [...]