An auto dealership with a high volume of business established specific cash controls to assure that no car was delivered to a buyer until the dealership had received or accounted for all payments due from the sale. Despite the required checks and balances, a fraud investigation found that a senior salesman was able to misappropriate cash payments from customers in excess of $25,000.
“The salesman was quite skilled in understanding how to thwart the controls and also in knowing how to cover his tracks,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “But this also was a case in which the fraud deterrence measures fell short of what was needed to protect the dealership and an overworked accounting manager made mistakes that allowed the fraud to occur.”
Anderson, a Certified Fraud Examiner, said the dealership established a checklist of all payments due on a sale — customer deposits and additional payments, bank or finance company payments and manufacturer rebates. Each salesperson was required to attach documentation for each payment (except for rebates) to the checklist, and the sales manager was required to confirm that all applicable payments were made or accounted for by signing the checklist. Finally, the accounting department was required to reconcile all payments due from each sale.
“Each of these anti-fraud controls made sense,” Anderson said. “They just didn’t go quite far enough.”
Salespeople at the auto dealership were required to take cash payments to the accounting manager, who would record the payment and issue a receipt, Anderson said. The dishonest salesman — realizing that the cash receipts book was a generic one that could be purchased at any office supply store — issued his own cash receipt to customers, attached a copy of the receipt to the checklist and pocketed the cash. When the sales manager reviewed the checklist, he would see the copy of the cash receipt and sign the checklist.
When the accounting manager performed the reconciliation — about 90 days after each sale because of the heavy workload — and found missing payments, the salesman would promise to collect the amount due from the customer. The next day, he would turn in cash he had “collected.” The overworked accounting manager never questioned the odd circumstances because the salesman was always able to collect the payment due, said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.
The fraud was discovered only after the controller took over when the accounting manager was out sick for an extended period. The controller discovered several customer accounts receivable over 90 days old and traced each of them back to the same salesman. The salesman apologized for the “few unusual lapses” and promised to collect money from the customers as soon as possible. He arrived the very next day with cash he had “collected” from five customers. The Controller thought it strange that the sales person was able to collect the past due amounts so quickly, and that all the customers paid in cash, even one for $5,000. The controlled expected to see checks for anything over $1,000.
Suspicious, the Controller engaged a forensic accountant to conduct a fraud investigation. The forensic accounting expert found more than $25,000 in outstanding customer accounts receivable from sales closed by the dishonest salesman. When questioned by the forensic accountant, the salesman admitted to having taken more than $50,000 in cash payments from customers, as well as from deposits on deals that fell through or deals that had not yet been completed.
“What the fraudster was doing was similar to a check kiting scheme,” said Anderson, a forensic accounting expert. “He would steal the cash, then hope that the fact that it was missing was never discovered. If it was, he returned he money. He would delay refunds on deals that fell through by telling customers the accounting department was slow to process refunds. He was very creative is getting a steady supply of cash and sometimes never having to repay it.”
The salesman was fired and with the help of the forensic accountant, the dealership referred the matter to local law enforcement for prosecution.
Anderson, a forensic accounting expert who also is a Certified Fraud Examiner, said the company could have avoided the theft by making three minor changes in its fraud deterrence measures. First, the company should have spent a few extra dollars to order cash receipts imprinted with the company logo and with a unique numbering system instead of using generic receipts. Second, the checklist should have required that the accounting department confirm that cash receipt number was one they issued. Third, the accounting department should have been required to complete all payment reconciliations within one week of the sale and to report any exceptions to the controller for immediate handling.
Does your fraud deterrence program have loopholes that could make your company vulnerable to fraud? A Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can identify weaknesses and recommend strengthened fraud deterrence measures to help protect your company, Anderson said.
This Tale of Fraud article is the fifth in a series of occasional posts that examine actual cases of fraud against businesses, non-profits or government offices and the fraud investigations that uncover how the fraud was perpetrated.
If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.