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We love our dealership vendors, but do they really love us back?

By Marilou C. Vroman, CPA, CFE

You know them well; the dent guy, your advertising agency, the landscaping crew.  We need them so we can stay focused on doing what we do best – selling and servicing vehicles.  As much as we appreciate our vendors, we also know they can pose a risk to the unsuspecting dealer by slowly diminishing the dealership’s financial health by quietly eroding profitability for personal gain.

How may a vendor take advantage of a dealership? In a high-volume store, sales managers are often so busy closing deals and getting cars “over the curb,” they may delegate the task of inspecting vehicles and authorizing dent or wheel repairs to a porter or a salesperson. If an unethical vendor becomes aware of this delegation of authority, they could solicit a porter with a $100 cash spiff grant the vendor permission to generate an additional $500 in repairs to the inventory than are actually necessary. The porter is $100 richer, and the vendor gets an extra $400 for doing nothing, all while the unsuspecting dealer pays the price. Porter kickbacks and excess dent or wheel repairs are by no means the only areas of risk. Fraudulent vendor activities can also involve towing, leather repairs, detailing, body work, and aftermarket product installations, just to name a few.

Vendor fraud is most easily perpetrated through a lack of proper internal controls, and/or the lax enforcement of those controls. It may also be  paired with collusion, a common fraud scheme whereby two or more individuals conspire to commit fraud against an organization. Collusion is usually more difficult to detect than a fraudster acting on their own.

So how can we reduce the risk of vendor-related fraud? Consistent application of internal controls is key.

Here are five specific precautions dealers can take:

  • Approved vendor list – An approved vendor list should be strictly adhered to and new vendors should only be added to the DMS by an individual other than the accounts payable clerk or any individual with authority to approve vendor PO’s or invoices.
  • Price lists – Obtain price lists in advance from vendors who provide multiple services. Rate increases without valid explanation should be promptly questioned.
  • Purchase Orders – Advise vendors that a purchase order number is required prior to initiating repairs in order to be paid. The PO must be dated and authorized by a manager on or before the repair date. POs should include the vehicle’s VIN, stock number, odometer reading, date, authorizing manager’s signature, description of repair, and the amount authorized. This information should be compared to and ultimately agree with information documented on the vendor’s invoice prior to payment.
  • Inspect what you expect – Perform a visual inspection of vehicles before and after repairs are completed. Dedicate an on-site workspace for vendors where work can be monitored. Periodically reconcile charges against vehicle inventory with a visual inspection of the vehicle to ensure all repairs have been performed.
  • Multiple bids – Obtain bids from three different vendors providing the same service and renew bids each year to keep current vendors honest in their pricing. The appropriate department manager, as well as the controller, should review these bids and unanimously select the winning vendor. Resistance by department management to engage in this process or to change vendors without cause should be considered a red flag.

Take the time to implement and enforce strong controls upfront when it comes to engaging and compensating outside vendors.  The honest ones will be glad you did; the dishonest ones will vote themselves off the island.

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