When we think of internal fraud within a dealership, the focus generally falls on the accounting staff – those with direct access to withdraw funds. But fraud can occur in less obvious ways, still with staggering impacts on the bottom line.
How much input do managers have on your monthly financial statement results? General managers are strongly encouraged by both dealership owners and manufacturers to meet sales quotas and achieve profitability targets. This pressure can lead to financial statement manipulation.
Take, for example, a less-than-stellar month. Maybe sales were good, but there were a lot of unusual expenses that ate up profits. Some dealers will opt to delay those expenses, recording them in a prepaid asset account, writing them off at the end of the year, most likely as a 13th-month entry. Is anyone else in your organization empowered to make that decision? Be mindful of GMs and Controllers who receive a monthly commission based on net profit – that $30,000 deferred expense increases the bottom line and, in turn, the commissionable gross for some. Best practice would be for the dealer principal to sign off on any expenses that are moved to the prepaid schedule.
Pressure to perform can lead to problems in the sales department. The Book and Return is a month-end tradition in many dealerships. These are deals that have been approved, but the customer can’t take delivery until early the following month. Management will ask accounting to post the deal, recording the sale before the vehicle has actually left the lot. These deliveries usually do occur, but we’ve seen stores where any potential deal gets posted – even some where the car is still in transit. Look for ageing uncollected customer CODs and contracts in transit, then check whether the vehicle is still in your possession. At first glance, this appears to be manipulating unit sales, simply robbing from one month to improve another. But for employees who earn incentives based on units, an extra deal or two might move them up to a higher bonus level. And if these ‘pre-deliveries’ have been RDR’d before the actual transfer of ownership, you risk problems with your OEM. Factory audits can lead to chargebacks for unearned incentives, which can also trigger legal action for false reporting.
Factory incentives help move metal – but are they being applied correctly? Manufacturers can choose to apply rebates to entire model lines or to specific trim levels only. If a $4,000 rebate that’s only applicable for a 6 cylinder coupe is applied on every trim level of that popular model, you may end up with an astronomical write off before you catch the problem. I’ve seen sales managers completely fabricate incentives to make a deal break even, knowing it will be months before accounting writes it off. Your first line of defense is an educated deal poster. Make the office aware of monthly programs – your deal poster should verify each claim to ensure it applies. Anything that falls outside program rules should be brought to the dealer’s attention immediately. Watch for aging factory receivables; most manufacturers pay within 30 days of the RDR.
These schemes aren’t only about increasing commissions; pushing sales and RDRs improve allocation and dealer ranking. It’s essential to recognize that pressure to perform can backfire when managers break the rules to hit unattainable goals.
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For more information on this topic, please contact a member of Withum’s Dealership Services Team.
