Most auto dealership owners know there is more to the business than selling cars and managing a robust service department. While these are the essential ingredients to a successful dealership, attention must also be given to meeting customer expectations, increased competition and less demand for warranty-related and other repairs due to higher quality vehicles. The pressures of managing a prosperous dealership make it easy for an owner to shift attention away from essential best practices of the business. Given all the moving parts in an auto dealership, it’s easy to forget about internal controls until the annual audit or when an issue is uncovered. Maintaining effective internal controls is crucial to protecting the business and its assets from dishonest employees, vendors, suppliers and others. Given the transactional nature of the business, it’s important to regularly review these policies to ensure maximum effectiveness and protection. To help clients, prospects and others, Wilson Lewis has provided a best practices summary of internal controls for auto dealers below.
Internal Controls Best Practices
- Segregation of Duties – It’s important to ensure that one person is not involved in all duties in the finance department as this makes it easy to commit and conceal fraudulent behavior. Ensure there are distinct separation of assignments in accounts payable, bank reconciliations, receivables, payables, titling and customer refunds. A key challenge many smaller dealerships face is the lack of staff to properly segregate duties. In this situation, it’s essential for a senior manager or owner to become involved in the review process. This ensures that policies are being followed and also limits the opportunity for fraudulent behavior.
- Purchase Orders – All purchases should be authorized by a manager level staff member or higher. It’s optimal to use a purchase order system which requires prior authorization by someone other than the individual making the request. This provides another level of control and ensures that requested purchases are for a legitimate business reason. Finally, it’s always a smart idea to require that purchase orders are attached to the vendor invoice for verification.
- Mandatory Vacations – Be sure to require mandatory vacations for all members of the finance and accounting department staff. This will ensure the opportunity for others to review their work, observe processes and create an opportunity for any inappropriate behavior to be discovered. It’s a red flag when an employee refuses to take a vacation or time away from the office because it can be a signal that they are concealing inappropriate activity.
- Background Checks – It’s always a clever idea to conduct background checks on any current or prospective employee that is involved in the accounting and finance function of the business. Thoroughly reviewing their past will give you additional insight into their character and level of trust to place in the individual. It will also ensure that someone with a questionable past is not put into a position of power over sensitive financial processes.
- Check Signing – It’s important to ensure that check signing responsibility is left to a senior manager or owner and not just a member of the accounting staff. In addition, be careful to review all check details to ensure the payee is an approved vendor. Finally, it’s important to ensure that checks over a certain amount require dual signatures when the check exceeds a certain amount. Doing so can prevent large checks from being written fraudulently.
- Conduct a Vendor Audit – Sometimes fraudsters will create phony vendors to make small payments to on a regular basis. This allows them to pay themselves large sums of money over an extended period while not being noticed. It’s important to regularly review a list of the dealerships vendors to verify essential data about the companies being paid. This can include address, owner’s name, phone number, contract terms and pricing. Call the vendor to ensure the details are accurate and that the business is legitimate. This will help to discourage potential fraudsters from using this tactic.
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Effective internal controls are essential to protecting the dealership’s financial assets and resources. While internal controls alone don’t guarantee that fraud won’t happen, they do go a long way in protecting your business. If you have questions about your internal control policies or need assistance with a tax or audit issue, Wilson Lewis can help. For additional information please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.