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Verbal approvals = Blank checks

By Marilou Vroman, CPA

In visiting multiple dealerships I’ve found varying degrees of internal control.  Some dealerships are highly intensive with strict protocols, processes and procedures where others are a bit more “relaxed” and “go with the flow.” It should be no surprise that the more relaxed dealership environments are more likely to be subject to fraud than those which are more structured.

One area we see frequent internal control weakness is in the transaction approval process.  Dealers hire managers and staff to act on their behalf and in their best interest.  Trust is implicit when hiring personnel.  That said, would you leave a blank check in the middle of the showroom floor for someone to spend freely without explanation? We see this happen every day.

For example, the used car department sends countless vehicles into the shop to have items repaired or accessories installed.  We typically expect to see a vehicle get ready form or a due bill prepared for every vehicle listing the items to be completed, such as safety inspection, new tires, accessories and so forth.  The used car department would either bear the cost of repairs either by directing the repair order to be charges against inventory while the vehicle is still in stock, or by charging a we-owe established at the time of sale.   In both cases, the used car department is technically the customer (and one of the service department’s best customers at times.) Even though these would be internal charges, the used car manager should still be given a written estimate in advance of the repairs being performed, and just like a retail customer, require the written management approval to complete the work.

What happens when repairs are performed “per Lenny” or “as per used car manager” or worse, without any indication of who requested or approved the work in the first place?  You have created a “blank check”.  Without requiring advance estimates and subsequent approval, the shop has a blank check to charge any amount for the repairs.  Granted, the shop should not take advantage of its best customer this way, and some managers are maniacal about charges against inventory or gross, but not to the extent of reviewing every line item of a repair order.  In a high-volume environment where thousands of vehicles are sold, how easy is it to slip in a tire, an accessory, another detail, or a few dent repairs?  On several thousand dollars of reconditioning per car, it’s very easy.  In fact, without approvals and proper control, these items can slip straight through the system and when the charges land on a used car schedule; simply written off as part of “schedule cleanup” by an accounting clerk without further question.

Your bank should not clear a check that has not been signed.  Your sales and service departments should enforce the same policy.

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