Can you trust your employees? Better yet, should you trust your employees? During a recent trip to the East Coast to visit a few different dealerships, two dealers told me about problems they had with employees stealing from them. If this was a problem for these two dealers, I wondered how widespread the issue really is.
A little bit to my surprise, the answer is it’s very widespread.
According to Rex Collins, a senior manager at Somerset CPAs in Indianapolis, who handles farm equipment dealerships for the firm, in the last 5 years, 80% of all dealership employees stole something. He says fraud costs the U.S. economy $400 billion each year. On the dealer level, one study concluded that dealers are losing $9 per employee per day from fraud. Over the course of the year, if you have 100 employees that can amount to $328,500, he says.
“It is rampant, and it does happen. It’s everything from little and insignificant up to very significant. It may be insignificant but it goes to character,” he says. Collins referenced one dealership he worked with whose office manager had stolen over $10 million over the course of about 12 years. Fraud isn’t limited to the office manager though; he says it happens across all departments and all employee demographics. You can find it in the parts department, the sales department, in payroll and everywhere in between.
If you look at your employees, Collins says 10% will never steal from you. “You can hand them your bank card and PIN and they’re never going to steal from you,” he says. Then there are about 10% who will always steal from you. In the middle, that 80% are the ones who could steal, and would steal if the opportunity were there. “I’m not telling you everyone is an innate thief, but if the situation is proper that 80% will take advantage of it.”
Fraud is worse today than it was 5 years ago, according to a survey of certified fraud examiners. But, fraud detection is better. That said, the survey also said fraud detection resources are inadequate. “In essence, the thieves are developing new ways to do this. We live in an electronic world. They are developing ways to do it quicker than we can develop ways to prevent it,” Collins says.
The number one way internal theft is discovered is through internal controls and the second is through internal audits. A customer reporting something comes in at third and the employee admitting to it is fifth. Collins says the top reason fraud happens is poor controls. “We discover it if we have controls in place, and it occurs if we don’t have those controls in place. In essence, if you put the policies and procedures in place and monitor them and enforce them, you will prevent fraud. Those dealers who are running a tight ship are running a tight ship for a reason and know they are saving $9 a day per employee,” Collins explains.
The second most common way fraud occurs is through a third-party collusion, which would be working with a vendor to send a false bill. For example, a parts employee works with a vendor and receives a bill for a part the dealership never gets and the employee approves it for payment and splits the money with the vendor.
According to Collins, there are three legs to fraud. First there’s the pressure or incentive to commit the fraud, which could be as simple as being greedy. Then there’s the rationalizing the fraud and the third is the perceived opportunity. That opportunity is the one dealers can control.
So what can a dealer do to eliminate that opportunity? Collins says controlling cash is huge and only one person should have access to each cash drawer and strict accountability should be maintained. It’s also very important to have an office manager who really knows the business because as the saying goes, “you don’t know what you don’t know.” An office manager who really knows the business will be able to better recognize when something is askew. You need to have control over all the electronic banking that goes on and account reconciliation needs to happen every month, he says. For payroll, Collins says the dealer should hand out the paychecks so he has the interaction with the employees and see every check.
When it comes to hiring new employees, be sure to check their references and prior employment. Ask if the individual is available for rehire, if the answer is no then you don’t hire them. “Why would you want somebody else’s dirty laundry,” Collins asks.
So back to my original question, should you trust your employees? Collins quotes Ronald Regan saying, “Trust but verify. So I trust my employees, but I’m going to verify that they’re doing what they are supposed to be doing.”
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