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Dealers must take steps to shield the business from fraud

November 10, 2010
The opportunity to commit fraud, plainly stated, is a weakness in a company’s internal controls that has been exploited by the fraudster.

Whenever fraud occurs, there are three aspects prevalent: the incentive to commit fraud, the rationalization of one’s actions, and the opportunity to commit fraud.

While incentive and rationalization are difficult to control, management can prevent many opportunities for fraud by monitoring and updating its system of internal controls.

Preventive controls are put in place before a transaction is entered into the company’s books, and include:

• Segregation of Duties Ensure no one individual has complete control over any one process.

• Policies and Procedures Address appropriate behavior, expectations, and consequences.

• Spending Limits Assign based on the individual’s role within the company. Thresholds for a second or third reviewer should be defined in company policies and procedures.

• Preapprovals/Required Approvals Outline the circumstances under which purchases and/or decisions are approved in advance.

• Budgets Establish and prepare on a department-by-department basis.

• Passwords Should never be shared or written down; should be of appropriate length and consist of a combination of letters, numbers, and special characters. Passwords should be changed periodically—typically every 90 days.

• Document Control Numbers Pre-number invoices and receipts and account for every number.

• Computer Backups Back up data on a regular basis and periodically verify the reliability of the backup.

• Job Rotation Rotate jobs periodically to ensure adequate coverage in the event of employee turnover, as well as to change who is handling sensitive information on a regular basis.

• Drug Testing Conduct before an individual is hired, upon promotion, or on a random basis. An individual with a drug problem will need money to purchase drugs.

• Credit Check Conduct before an individual is hired or promoted into a more sensitive position. If hiring for a financial position, be wary of hiring an individual with bad credit—he/she will be coming into the company with incentive to commit fraud.

If you implement one new control, let it be the perception of increased detection and the assurance that the company is willing to impose consequences appropriate to the situation, up to and including prosecution.

This article is adapted from "A Dealer Guide to Preventing and Detecting Fraud," the first publication to be delivered to members online, upon this month’s launch of NADA University.

Available only through NADA University’s Resource Toolbox, all publications will include an executive summary, electronic routing to any appropriate dealership staff, and online tracking to ensure the material was reviewed and understood.