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Internal controls, vigilance needed to combat employee theft

November 22, 2010

One worker cooks the books to embezzle hundreds of thousands of dollars. Another steals ompany assets, using the company postage machine to stamp his outgoing holiday greetings. A third passes the workday stealing time, by dreamily roaming the Internet's expanse. Employee theft can take many forms, forcing vigilance to fight it.

Statistics indicate that three of 10 employees are honest, another three are dishonest, and the other four also might be dishonest if conditions permit. The primary reason people steal: opportunity.
"What you need to do in your dealership is, remove that opportunity," said Ted Cesarz, a partner with Crowe Chizek & Co. who led a recent CATA seminar presentation, "Combating Employee Theft."

The motives to steal at work are various: excessive gambling, high personal debt, extramarital involvement and related blackmail, use of controlled substances, greed, revenge and even justification.
As with many problems, dealers can spare themselves risk by taking precautions during the hiring process. Preemployment procedures should include

  • credit and reference checks
  • driving history checks
  • honesty checks, using polygraphs and other means
  • bonding application

"If you can't get a good reference from a dealer calling a dealer," said Cesarz, "have the accountant call the accountant."

Crowe Chizek surveyed 113 area dealers last summer, and 111 of them indicated they had been victimized by employee theft. And of the two dealers who said they had not, Cesarz said he was aware of theft at one of the stores.

Employee theft transcends departments and is committed even by those workers who never touch cash. Consider the technician who performs unauthorized work on his own car or a friend's car. A repair order should accompany every vehicle being serviced.

More than 20 percent of the surveyed dealers said one of their salespeople or managers had loaned a vehicle to a third party without approval; kept a customer's deposit rather than promptly receipting the money; and added or removed an accessory on a vehicle without an internal order. Fifteen dealers said their workers even stole vehicles.

Case: An F&I manager quotes the highest rate to customers and accepts their down payments. He then reworks the paperwork at a lower rate, but keeps the monthly payments at the same amount as the original amounts he quoted the customers. The F&I manager then keeps the difference between the down  payments submitted and the amounts needed on the contracts submitted to the financial institution.

Case: Service Department staffing on Saturdays amounts to three technicians but just one parts employee. When the parts employee is busy, the technicians help themselves in the parts department.
Case: A license and title clerk intentionally inflates out-of-state sales tax amounts to F&I personnel. To pay the tax, the clerk would prepare two checks, one to the state and one to the customer. However, the clerk keeps the customers' check and deposits the funds into her personal account, taking $135,000 over two years.

Case: The office manager arrives early in the morning and works the cashier's desk. When customers pay with cash, the manager would pocket the cash, destroy the repair orders, and make journal entries to various accounts to hide the thefts. The total loss over seven years exceeded $1 million.
An operations review by external auditors uncovers employee theft just 5 percent of the time. In  contrast, 28 percent of thefts are discovered by accident.

Cesarz said a dealer is is five times more likely to detect theft using internal controls-for instance, have someone independent of all accounting functions open the mail each day and make a list all checks received-than to rely on auditors.

30 minutes to better controls
Dealers can implement various means to uncover theft and discourage future acts of larceny. The following list proposes 13 surprise monthly control checks.

  • January: Count petty cash and review vouchers.
  • February: Personally hand out payroll checks to all employees.
  • March: Review small balances in contracts in transit and vehicle receivables.
  • April: Compare floor plan check to statement for three deals.
  • May: Put $10 extra in register and check balancing.
  • June: Cycle count parts bins.
  • July: Review receivables statements not mailed.
  • August: Review computer security passwords.
  • September: Review bank reconciliations for unusual items.
  • October: Review the detail in the cash sales clearing count.
  • November: Review several journal accounts and look at support.
  • December: Review journal entries and question transactions.
  • 13th month: Review auditor adjustments to see the type of entries that are required to close the books.