I have investigated a number of frauds in my career, and those frauds have cost dealerships several hundred-thousand-dollars in losses. One particular case involving a parts department offers a good example of the schemes employed by fraudsters and how you can reduce your risk.
Diverted Funds Using Phone
In this scheme, a parts manager was charging parts to wholesale customer credit cards and diverting the funds elsewhere. Copies of certain wholesale customer credit cards were kept on file and charged when purchases were made. The parts manager used a device that plugged into their phone, and the funds were diverted to a personal account.
Sometimes, the customer returned the original parts. Rather than issue a credit to the card, the parts manager would either give the customer different parts of the same value or issue a credit memo to the customer’s account. The original proceeds remained in the parts manager’s account. In at least one instance, a wholesale customer was charged twice on the manager’s device. When the customers questioned the second charge, they were given credit through their receivable account with the dealership
The fraud was uncovered because the parts manager appeared to have lost track of customer activity. Customers noted unrecognized charges and called the General Manager to complain. The subsequent investigation led to the discovery of the fraud.
Although I do not necessarily agree with keeping wholesale customer credit card information on hand, I understand the efficiency created by having it. With that being said, there are controls that can be implemented to mitigate the fraud risk.
Secure customer credit card information and assign responsibility to it.
For example, the credit card information could be locked in the office and accounts receivable manages it. The parts manager and accounts receivable can meet daily and process all the credit card transactions at once.
As part of the vendor/customer communications each year (insurance certificate, sales tax exemption, W-9, etc.) update the credit card information on file.
Implement a policy that all credit memos require an original invoice to credit
When I questioned an accounting clerk about the issuing of credit memos without a parts ticket to reference, I was told it was a manager who requested the credit. It’s important to understand that clerks often look at any department manager as a supervisor. Train your accounting staff to cross-reference any credits issued in any department. I teach my staff that if something does not look right, it probably isn’t.
Review the list of credit memos issued and test a sample
Trace a sample of the credit memos to the original invoice and confirm the parts credited were actually purchased. You can take it one step further to verify the original invoice was posted to accounting.
Eide Bailly has dealership specialists that can evaluate controls in all of your departments. If you have questions about the existence or effectiveness of your internal controls, an Internal Control Review will provide you with the analysis and recommendations you need. Contact us to learn more.