3 Min ReadNovember 29, 2012

Fraud Happens

OK. Business is coming back, and it’s time to get back to running it instead of worrying about it. And I want you to remember all the horror stories you have ever heard about internal theft because it is back too. And big time. So let’s have a quick review here.

First, it happens. And it can happen anywhere, and it can be anyone: The most droll accountant, or the sweetest little gal in accounts payable. Anybody. Anywhere. Anytime.

All of us are subject to pressures. Financial, personal, family, corporate. You name it. We got it. Pressure, plus opportunity leads to rationalization. You put Pressure, Opportunity and Rationalization together, and Bingo, you got fraud.

Here’s a short list circumstances surrounding past frauds in dealerships over the years.


Little stuff:

  • A refund at the parts counter (No signatures, no audit, no checking on customer name or address)
  • A discounted RO (no management authorization, no reason given, no customer follow up to determine why)
  • On-hand counts of parts inventory come up short. No explanation
  • Special order parts are not on the shelf, but still show as not picked up


Big stuff:

  • Accounts Receivable detail does not match General Ledger
  • AR charges are not authorized nor collected
  • Accounts Payable vendors are not reviewed
  • Payments are not authorized by two or more separate dealership personnel
  • One employee opens all the mail


The little things add up to thousands, and the big things hit you in the knees with millions lost and never recovered. The largest I have heard of? $1.2 million by the son-in-law over the course of 18 months. Imagine that Thanksgiving dinner.

The solution? It comes on two fronts. The first is what accountants call Internal Controls. Think about it as your defense. These controls specify a separation of duties so that no one person handles any one complete transaction.

Fraud seldom involves collusion. It’s too hard, and it involves trust among thieves, which is the supreme oxymoron. So if it takes two people to get that AP check signed, two people to refund that money to the customer, two people to count the till and agree on over/short, you are well on the road to controlling your losses.

But you won’t catch every fraud with just internal controls in place. You have to be more proactive than that. You have to know when it is going on, even when you can’t figure out how they are doing it.

Impossible, you say? Not. You just need a good offense. And that offense is a careful observation of your employees. This works because guilt generates fear. Fear generates stress. And stress influences behavior.

With time, the perpetrator adapts certain behavior and lifestyle patterns to deal with the stress of the theft, and these behavior patterns are well known and recognizable. Personal behavior of the perp may change to include the following:

  • Loss of sleep
  • Excessive drinking
  • Use of Drugs
  • Become irritable and suspicious
  • Can’t relax
  • Can’t look people in the eye
  • Get defensive and argumentative
  • State belligerent opinions
  • They sweat excessively
  • They work standing up
  • They never take a vacation


Lifestyles change also. The availability of cash makes the use of stress-relieving toys almost irresistible. New cars, expensive clothes, jewelry, new or remodeled homes, and the purchase of our products (motorcycles, motorhomes, boats etc.) are common in advanced frauds.

Interestingly, the “benefits” of fraud are frequently shared with friends, family, and co-workers. I often see that suspicion of fraud has been triggered by observation of extravagant meals, trips, and gifts provided by the perpetrator to co-workers. Human nature is an odd mixture of taking, and giving. Strange, isn’t it.

It is up to you to protect your business from all sorts of threats, and fraud is just one of them. Define and install your internal controls. Then, watch for changes in behavior, and you may just be surprised at what you find.

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CDK Global
By CDK Global