With Jodi Kippe, CPA & Partner Retail Dealer Practice at Crowe Horwath LLP. Moderated by Mike Bowers, Executive Editor at DealersEdge

Transcription

1 How to Identify and Stop Internal Theft in the Dealership! Failing to be alert for employee schemes to embezzle or otherwise steal from the dealership can be not only costly - It's embarrassing! With Jodi Kippe, CPA & Partner Retail Dealer Practice at Crowe Horwath LLP Moderated by Mike Bowers, Executive Editor at DealersEdge

2 Jodi Kippe, CPA & Partner Retail Dealer Practice at Crowe Horwath LLP Jodi Kippe is with Crowe Horwath and Company LLC, a top 10 public accounting, and consulting firm. Jodi is a CPA with over 20 years experience working exclusively with Crowe s Retail Dealer group that specializes in assurance, tax, financial advisory, risk management, and performance consulting to dealerships. She has lectured at NADA and AICPA conferences, and is a published writer, with articles featured in trade magazines, periodicals, and business journals. Professional Activities and Certifications American Institute of Certified Public Accountants Florida Institute of CPA s Crowe Chizek s CFO Roundtable, Moderator SunTrust s Commercial Dealer Services Advisory Board Women s Automotive Association International, Member Frequent speaker at various industry groups and trade associations. Contributor to articles published in various trade magazines, periodicals & business journals, including NADA s AutoExec magazine. Education B.S.B.A. in Accounting, Central Michigan University

3 Internal Controls - Key for Mitigating Theft Risk Jodi Kippe, Partner Audit Crowe Horwath LLP - Retail Dealers

4 Presenter Jodi Kippe Audit, Crowe s Retail Dealer practice More than 25 years experience in providing audit, risk, financial advisory, and performance consulting services for retail dealerships Consults with large dealership groups on centralized accounting, policy and procedures manual and internal audit function A published writer, with articles featured in trade magazines, periodicals, and business journals on many aspects of dealership operations A CPA, and member of the American Institute of Certified Public Accountants (AICPA) as well as Florida Institute of CPA s 2012 Crowe Horwath LLP 4

5 The Perfect Storm for Fraud The current economic environment has created the Perfect Storm for Fraud! Pressure Opportunity Rationalization 2012 Crowe Horwath LLP 5

6 The Perfect Storm for Fraud Pressure Reduced income Medical or other bills Expensive tastes Addiction problems Opportunity (dealership management has most control) Weak internal controls Reduced employee counts Poor management oversight Rationalization Borrowing and fully intends to pay back Job dissatisfaction therefore something is owed to him/her Justified to save family, home, car, etc. Doesn t understand or doesn t care about consequences of their action 2012 Crowe Horwath LLP 6

7 2008 CFE Fraud Statistics In 2008, 7% of US GDP, or $994 billion, was lost to fraud Over half of the fraud caused losses of at least $100,000 Fraud is costly the median fraud was $175,000 with one-quarter losses at least $1 million Lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur Occupational fraudsters are generally first-time offenders Source: ACFE s 2008 Report to the Nation on Occupational Fraud and Abuse 2012 Crowe Horwath LLP 7

8 Alarming Statistics Approximately 33% of reported frauds involved 2 or more people: median loss was 6 times greater in the case of collusion; median loss was 8 times greater in the case of collusion of managers and employees Average scheme existed for 18 months before detected 9 of 10 asset misappropriations involve CASH Fraudulent disbursements 71% Skimming (before it s recorded) 32% Cash larceny (after it s recorded) 9% Source: 2002 ACFE s Report to the Nation on Occupational Fraud and Abuse 2012 Crowe Horwath LLP 8

9 More Alarming Statistics When? Frauds by perpetrators living beyond their means: 39% Frauds by perpetrators experiencing financial difficulty at the time of the fraud: 34% (Do you think these conditions exist today?) Fraudsters with wheeler-dealer mentality: 20% Fraudster unwilling to share duties: 19% How? Corporate-fraud victims that blamed lack of adequate controls: 35% Thou Shalt Not Commit Fraud Employees can resist everything but temptation CFO.com 2012 Crowe Horwath LLP 9

10 More Alarming Statistics Who? Frauds by persons in the accounting department: 29% Frauds by executives or upper management: 18% People years old: 35% People with the organization > 5 years: 52% People with income < $50,000: 40% How were they caught? Frauds exposed by whistle-blowers: 46% (Do you have a system in place?) Thou Shalt Not Commit Fraud Employees can resist everything but temptation CFO.com 2012 Crowe Horwath LLP 10

11 Do you want to wait? What happens afterward? Companies that modified controls after fraud was detected: 78% Do you want to wait for this to happen to your dealership?? Thou Shalt Not Commit Fraud Employees can resist everything but temptation CFO.com 2012 Crowe Horwath LLP 11

12 Internal Controls - Key for Mitigating Theft Risk Internal Controls Analysis: Dealership management should review their internal controls periodically, looking for: Areas for improvement, Identification of weaknesses; and Adapt to changes in structure, operations or market which may necessitate new controls. Review for segregation of duties Break it into specific accounting areas for a more manageable and effective analysis 2012 Crowe Horwath LLP 12

13 Segregation of Duties Review Person reconciling bank account(s) doesn t have other bank account responsibilities such as check signing authority Check signer doesn t make bank deposits Accounts payable clerk doesn t mail checks or have access to cash receipts Accounts receivable clerk doesn t receipt cash or write off receivables Controller/office manager isn t the DMS administrator Parts personnel don t complete parts cycle counts or parts physical General journal entry computer access is limited to few very; maybe one person to enter all journal entries 2012 Crowe Horwath LLP 13

14 Internal Controls - Key for Mitigating Theft Risk Review Internal Controls - key accounting areas for analysis: Cash Disbursements Cash Receipts General Journal Entries Payroll Parts and Inventory Sales Vehicle Inventory and Sales Service Sales Body Shop 2012 Crowe Horwath LLP 14

15 Cash Disbursement Example Questions Bank general ledger account(s) are reconciled to bank statements on a timely basis (daily, weekly or monthly depending on volume of activity)? Is Positive Pay feature in place with the dealership's bank? Wire transfers: Is Block and Filter feature in place with the dealership s bank? Is documented approval required before the wire is executed? Are call back procedures used to validate the authenticity of the person requesting the wire? Are phone requests accepted only for those customers for whom the Bank has a completed wire transfer agreement on file and a PIN or pre-authorized code has been assigned? 2012 Crowe Horwath LLP 15

16 Cash Disbursement Example Questions Signature authority over bank account(s) (including authority to transfer funds among accounts and process EFTs) is restricted to management personnel not responsible for recording cash disbursements or reconciling bank account(s)? Vendor invoices are processed by Accounts Payable Clerk(s) who is (are) independent of purchasing, receiving and cash functions (not an authorized check signer or not responsible for posting of cash receipts)? Statements received from suppliers and service providers are reconciled to the A/P ledger prior to submitting for payment, and differences are investigated? Reconciliations are retained and signed off by preparer and reviewer? 2012 Crowe Horwath LLP 16

17 Cash Disbursement Example Questions Signed checks are mailed by employees who are independent of disbursements and accounts payable functions? Are voided checks retained and filed numerically with all other check copies and all voided checks recorded in the computer system immediately? Is an approved vendor list utilized? Does the CFO or Controller analytically review monthly expenses which may include a comparison to budget, prior month and same month prior year to identify significant variations? 2012 Crowe Horwath LLP 17

18 Cash Receipts Example Questions Are all checks restrictively endorsed immediately upon receipt? Is a remote deposit service utilized for depositing checks? If manual receipt books are utilized, are they reconciled to the system generated cash receipts by someone independent? Is access to credit card machines limited? Do individuals handling cash post general journal entries? Is the cash clearing account zeroed (reconciled) daily? 2012 Crowe Horwath LLP 18

19 General Journal Entries Example Questions Are paper journal entry vouchers used? If yes: Vouchers are signed by preparer? Vouchers are signed by approver? Vouchers require a description? Vouchers require supporting documentation? Journal entries impacting the departments approved by the respective manager? Is a data entry stamp utilized? Are all journal entries approved by the Controller? Are journal entries made by the Controller reviewed? 2012 Crowe Horwath LLP 19

20 General Journal Entries Example Questions Is the preparation of journal entries limited to accounting personnel only? Is access to post journal entries reviewed periodically? Are EFT/ACH transactions recorded though the general journal? Are there more than 50 journal entries prepared per month? Is the general journal reviewed monthly by the Controller with all entries agreed to manual journal entry vouchers? 2012 Crowe Horwath LLP 20

21 Payroll Example Questions Is access to the payroll master file limited to the Payroll Clerk and the highest-ranking accounting person (i.e. CFO) in the accounting department? Is the processing of payroll limited to one person in the accounting department? Does someone other than the person processing payroll distribute payroll checks/direct deposit advices? Does the Controller complete an analysis of top compensated employees per payroll register/form W-2 s as well as compute federal and state income tax withholdings as a percentage of gross wages and provide to dealer for review? 2012 Crowe Horwath LLP 21

22 Parts and Inventory Sales Example Questions Are credit memos approved by the Parts Manager with the part being returned inspected? Are voided parts invoices approved by the Parts Manager? If not, does the Parts Manager review the voided parts report? Are parts overrides limited to the Parts Manager? If not, does the Parts Manager review the override report? Are parts inventory cycle counts performed by someone independent of the parts department? e.g. Looking to spot check accuracy of the parts bin knowing that someone is looking creates a deterrent. Is the parts pad reconciled to the general ledger by someone in the accounting department or the Parts Manager and reviewed by Controller? 2012 Crowe Horwath LLP 22

23 Vehicle Inventory and Sales Example Questions Are periodic physical inventories of new and used vehicles taken and reconciled to the general ledger with difference resolved timely? Are physical inventories for new and used vehicles traced to MSO s or titles? Are adjustments to deals approved only by the General Manager, Sales Manager or Controller? 2012 Crowe Horwath LLP 23

24 Service Sales Example Questions Is the approval of granting credit to customers limited to accounting personnel only? Does the dealership schedule work-in process (WIP) by matching technician s time to repair order controlled by R.O.s number? Are approval of adjustments to work-in-process accounts limited to the Service Manager only? Does the Service Manager periodically review the open repair order report? Are voided repair orders approved by the Service Manager? If not, does the Service Manager review the voided repair order report? 2012 Crowe Horwath LLP 24

25 Body Shop Example Questions Is the closing of repair orders limited to the cashier only? When a physical inventory of the body shop materials is taken, is it taken by someone outside the Body Shop Department? Are significant variance followed up timely? Do policy adjustments require Body Shop Manager approval? 2012 Crowe Horwath LLP 25

26 Internal Control Analysis Perform an internal control self-diagnostic to assess your risk level in each of the key areas (Crowe CARD) Have different personnel complete to identify differences in the understanding of your dealership s internal controls Based on answers a gauge assessment is provided in each area: Green - No identified significant weakness; Yellow - Identified potential weakness; Red - Identified weakness. Based on your assessment take action 2012 Crowe Horwath LLP 26

27 Summarized Results Each area is measured with a gauge: Green No identified significant weakness; Yellow Identified potential weakness; Red Identified weakness Crowe Horwath LLP 27

28 Develop Your Plan Red or Yellow Prioritize your weaknesses that you want to address Develop and implement your remediation plan to address those weaknesses; Ensure that you have a timeline for completion Green Develop your testing plan for the areas not identified as weak Again, ensure that you have timeline for completion Inspect What You Expect! 2012 Crowe Horwath LLP 28

29 Would you find value in having a further conversation? Jodi Kippe, CPA, Partner Crowe Horwath LLP Tel jodi.kippe@crowehorwath.com For information on the issues critical to dealership accounting and operations: subscribe to Dealership Flash at Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction Crowe Horwath LLP 2012 Crowe Horwath LLP 29

30 Notice These slides ("presentation") have been prepared to present general information on selected accounting and reporting subject matter. The content of this presentation, which is the copyrighted work of Crowe Horwath LLP, does not constitute audit, accounting, financial reporting, income tax reporting or any other professional advice and should not be relied upon as such. The content of this presentation should not be duplicated or redistributed. Crowe Horwath LLP shall not be responsible for any loss sustained by any person or entity that places reliance on the content of this presentation. The content of this presentation was not intended to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer Crowe Horwath LLP 30