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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 control over receivables, journal entries, or cash. 

Let’s consider a basic cash theft scheme where a salesperson is transacting with customer A and B.  Customer A and B  have given the salesperson a $1,000 cash down payment.  The salesperson pockets up to $1,000 cash from customer A and subsequently uses all or a portion of customer B’s down payment to cover the balance due for customer A.  In this scheme, the salesperson will continually move funds or “lap” the funds from one customer to the next to ensure the uncollected balance is not questioned by management or accounting. 

In a more complex cash theft scheme, the salesperson manipulates the deal structure to eliminate all or a portion of the down payment  due.  This scenario is more prevalent in high volume stores where the sheer volume of sales transactions creates a rapid moving and reactionary environment where the structure and settlement of individual deals is much less likely to be questioned.  In these more complex schemes, deal gross profit is reduced, ACV of trades are manipulated, fictitious incentives or rebates are recorded, all after the customer has signed documents, to effectively mask the diversion of cash.  Fraudsters are most successful in stores where frequent write-off’s and adjustments of deals by accounting are commonplace and accepted.  Weak internal controls create great opportunities for cash theft. 

Some dealers have a single point of contact in the vehicle sales experience.   In this example, the salesperson handles the entire transaction from the initial contact with the prospective customer, to coordinating  financing, to delivery.  The risk is created in this scenario when there is a lack of segregation of duties in handling the customer’s cash.  The general rule of thumb is the person who authorizes and structures the transaction should be separate from the person who receives customer cash related to the transaction, and that person is separate from the person recording the receipt of cash.   The bottom line is no single person should solely in control of a single transaction. 

Below are a few suggestions to reduce the risk of this type of fraud in your store:

  • Separate the deal structuring personnel from cash collection (customer pays a cashier and gets a DMS generated receipt; cash is not given to salesperson or F&I department)
  • Prepare deal settlement document to be signed by salesperson, customer AND sales manager confirming type and amount of funds received.  This form should include a copy of the actual customers payments (check, credit card, cash slip etc.) in the deal file before billing.  
  • Management approved deal recap with terms and gross profit must agree to accounting at time of billing. 
  • Proof of incentive eligibility in the deal file before billing.
  • Management approved trade ACV in deal before billing. 
  • Require completed third party funds authorization forms with copy of third-party ID. 

Accounting staff should be trained to watch for signs of lapping or cash theft and bring unusual transactions or those lacking required funds or documentation to the attention of the general manager immediately.  Strict enforcement of effective internal controls may be perceived as inconvenient, unpopular and met with resistance; however, it is ultimately the key to reducing the risk of fraud in your dealership. 

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