Process Nostalgia

We’ve seen a lot of change in the past few years, haven’t we? New ways of managing inventory, marketing, and hiring staff. While there’s been some great innovation and opportunity, I still feel a little nostalgia for some old routines that have drifted by the wayside. How many of these old chestnuts do you remember? And are they still part of your accounting control process? If not – they probably should be.

I have many fond memories of ways the local bank would help protect a dealership’s cash. Remember getting phone calls when a check you deposited bounced or a signature looked strange on your company check? How about statements – complete with every canceled check – being mailed to the dealer’s residence? My boss would flip through it and have a question or two for me every month. Now statements are available online (easily forgotten by a busy dealer) and getting scanned copies of the canceled checks are an additional fee – I know many dealerships that don’t get them.

This is a routine that is worth re-instituting. Things have changed significantly in banking – now, with EFT payments, money can be flying out of your bank without your knowledge. It doesn’t matter if you sign every check – if you don’t have effective controls in place, your office manager, controller, or anyone with the account numbers printed on the bottom of a check can authorize online payments to vendors directly with no other approval. When you sign a check, you have a backup attached to review. That step is circumvented by paying online. Banks are driving their clients to use Positive Pay, which requires the office to submit a daily list of checks and approved EFT transfers. That works well as long as the person submitting the list isn’t the one committing misdeeds.

I suggest dealers make a habit of looking at the online bank statement. Scan through the check copies (add that feature if you don’t have it.) just to make sure those signatures look authentic, and checks seem reasonable. Ask to see the backup that corresponds to EFT payments – I would recommend the office keep a file with a copy of key details of the payment, including who authorized it. Controllers, you should be doing these same things.

There’s more that I miss about banks – local branches. I know of many dealerships that maintain two different operating accounts. Their main checking account doesn’t have a local branch anymore, so checks are deposited daily using a scanner. Fast, efficient – fantastic. But what about the cash received? That often piles up in the safe until there’s ‘enough’ worth making a run to the other bank, where we can get petty cash, change for the register, and deposit currency. Define ‘enough’ cash to justify a deposit. Please ensure that each day’s receipts are being settled and a deposit slip is created to track the day’s transactions. I still believe in that daily deposit run to the bank – the longer cash sits around, the more likely some could go missing.

Cash isn’t the only changed process. Years ago, I worked for a dealer who would open the mail and hand every check to the receptionist. She listed each check in a log – nothing fancy, just who the check was from, how much, the date, and the check number. The checks were then receipted back in the office by the A/R clerk or whoever else figured out what the payments were for. I’ll admit, I didn’t understand why this was happening. It seemed redundant to me, and I stopped the process when I had something else to keep the receptionist busy with. I later realized that the log kept whoever was receipting the checks honest. If no one knows what checks came in, the payments can be applied to any account to conceal missing money.

Let’s say a body shop pays their statement with an envelope of cash every Friday. Instead of depositing the cash payment, one could apply a check from a different customer to the body shop’s account and pocket their cash. And continue moving check payments to different customer accounts to cover up the theft. This is known as lapping. Of course, when the statements get mailed out, the customer will see their payment wasn’t applied – which leads me to another suggestion: have someone else print and mail the statements. Look at the addresses – is there one? Does it seem reasonable? A fraudster A/R clerk probably won’t mail statements to customers with unrecorded payments, or they could be
addressed incorrectly and then never received.

So that log the receptionist used to keep? Perfect for a spot check – every check logged in today should be receipted to that very customer’s account by tomorrow. By the way, I put this back into practice when the A/R clerk was trying to track down a check that went missing. Everyone in the office was aware of the log and referred to it often.

Employment has changed dramatically, too, hasn’t it? Good help is hard to find. Many controllers and office managers took early retirement during Covid, and I’ve seen plenty of replacements who just aren’t experienced. Understanding accounting is the easy part – it’s the peculiarities of this business that takes years to learn. Maybe the management hasn’t changed, but the office staff has been thinned. With unit sales plummeting, most dealerships don’t need as many people in accounting. When the office staff is two people (or less), separation of duties is challenging.

This is at the top of the list for fraud prevention. It’s common sense, really – we all know that the person who handles accounts receivable shouldn’t be also completing the bank deposit. And the person making the bank deposit shouldn’t be doing the bank reconciliation. We should have two people sign a check – two people who understand and will look at the backup that’s attached. If these divisions are impossible,
it’s time to get creative.

I work with dealers who have removed the process of bank reconciling out of the office entirely. I’ve seen family members, cashiers, and administrative assistants all be assigned this important task. But remember – it’s not just ‘ticking and flicking’ – when a rec is complete, it should be examined. Are there aged deposits that haven’t cleared? Unusual checks cut? Are payees on checks the same as what’s been posted to the accounting record? Some dealers rely on outsourced bookkeeping services to handle payables and receivables. There are many advantages to sending these tasks outside the dealership.

I have one more long-forgotten accounting process I’d like to remind you of. Controllers will know, but dealers, this might never have been on your radar. I’m reminiscing about the days when journal entries were formally written on forms and stored in folders or binders. When anyone in the office cleaned up a schedule, corrected some postings, they would write the entry on a sheet of paper with an explanation and turn it into the office manager. All entries were kept together and would be referred to if there were any questions – sometimes, there would be quite a story written out about what caused the need for this adjustment.

Most DMS’ now make it so simple to adjust the original posting that journal entries don’t occur as often. That’s a shame because it’s quite easy to hide activity by changing the original entry. If I see a journal entry has been posted to apply a payment to a customer’s account, I will find that unusual. Payments come in through cash receipts or credit memos on returned parts. By looking at the source of entries to accounts receivable, I can pick out unusual activity – I would see this journal entry and try to look at it in the system to determine where did this ‘payment’ come from? Some entries are complicated, with many different debits and credits that result in a balanced transaction without a clear movement from one account to another. That’s where the written form comes in handy – it’s much easier to see what the poster was trying to do, as well as how and hopefully why they did it. Controllers, Office Managers – let’s bring back that journal entry file and stop anyone from adjusting cash receipts.

We’ve all heard that fraud is hard to detect. I’ve had plenty of dealers tell me they don’t want to discuss fraud schemes with employees – it might give someone an idea. This could be true, but any fraud expert will tell you most cases are revealed from a coworker’s tip. Talk about fraud! Follow up with ways to prevent it. The best deterrent to theft is the likeliness of being caught. When fraudsters see that steps are in place to catch unusual activity, they’re less inclined to try. And if your staff understands what could go wrong, they are far more likely to catch problems.

It’s always a great idea to have a fresh set of eyes on the books periodically. Large dealer groups often employ internal auditors who regularly evaluate accounting controls. Some dealers would benefit from outsourcing that role – consultants like myself can visit monthly, quarterly, or even just a one-time checkup to point out weaknesses and help keep your office reliable and responsible.

Technology has removed the need for many old office procedures, but it also opens the door to new potential loss scenarios. It’s easy to do away with old tasks that aren’t understood – we’re all looking to save time. Don’t lose sight of these important yet simple steps to safeguard your company’s cash.

Author: Jen Moylan | [email protected]