Protecting Your Auto Dealership From Fraud

Owning and operating an auto dealership can be a rewarding experience. Despite the long hours and myriad of issues facing the dealer, a well-run dealership can be a source of satisfaction and financial reward. However, the complexity of auto dealership operations can give employees and others the opportunity to commit fraud, thereby diverting significant profits from the dealership. This article will address several of the most common dealership frauds and provide solutions for preventing them.

Certain departments are more likely to see fraud. These include: new car sales, used car sales, service and parts. Here are some fraud risks in each of these departments.

New Car Sales

Problem: Sales management or staff issuing “dealership rebates” not authorized by the manufacturer

Solution: Require all salespeople and sales managers to sign a statement acknowledging that “dealership rebates” are not permitted. Have your controller or accounting manager review every financed sale to make sure that no “dealership rebates” are present. Because this scheme is also accomplished with a customer receivable or promissory note to reflect equity in the bank deal, any promissory notes or receivables must be approved by the general manager or dealer.

Problem: F & I or sales employees preparing fraudulent credit applications for customers

Solution: Inform all employees, in writing, that having customers sign blank credit applications is prohibited. Require that all deals where the customer seeks financing include a one-page document (with very large type) that states, “Customers are not permitted to sign blank credit applications.” The document should require that the customer sign an acknowledgement of this.

Used Car Sales
Problem: Used car management wholesaling cars below book value or purchasing cars at auction for excessive prices in return for kickbacks

Solution: The accounting department should be required to track the source and price paid for all used cars brought into inventory. The accounting department should also regularly check the price paid for used cars purchased at auction against the book value. In addition, general managers or dealers should regularly review all used car sales with a gross profit of less than $1,000 in order to determine the cause.

Service Department
Problem: Sales staff releasing serviced vehicles without customer payment

Solution: Make sure that only authorized service personnel have access to customer vehicle keys. Post signs prohibiting anyone other than authorized service personnel from releasing a customer’s vehicle. Inform all employees that they will be held personally financially liable for any unpaid repair bills if they allow a customer to take their vehicle from the service department without paying the bill in full.

Problem: Service staff charging the manufacturer for warranty repairs not performed

Solution: The service manager should make sure that all service staff members (service writers and mechanics) understand the implications of warranty repair fraud. Advanced authorization from either the service manager or assistant service manager should be required for all warranty repairs. Evaluation of service management job performance and bonuses should include controlling warranty repair charges to the manufacturers.

Parts Department

Problem: Parts department management or staff substituting aftermarket parts for manufacturer-authorized parts

Solution: Make sure that all parts and service personnel are adequately trained regarding the requirements to use manufacturer-authorized parts. Consider installing a fraud hotline that allows employees to anonymously report allegations of fraud (such lines are relatively inexpensive to install and use). Also, have the accounting department conduct unannounced spot bin counts to determine if all of the inventory in the parts department is on the pad.

Problem: Parts department management writing off parts as obsolete and then selling the parts off the books

Solution: The general manager or dealer must review and approve all such write-offs. The accounting department should prepare a comparison of the obsolete parts identified by the manufacturers and those being written off. All discrepancies should be investigated. Also, on a monthly basis the accounting department should reconcile the pad to the general ledger balance. Variances here also need to be investigated.

The Annual Check-up
Just as people have an annual physical exam or check-up to make sure they’re well, every dealership should have an annual check-up to minimize the likelihood that its health is at risk due to fraud. One of the best ways to prevent fraud in your dealership is to let employees know that you are regularly checking up on them. So by taking this relatively inexpensive measure on an annual basis, you are killing two birds with one stone. While the annual check-up alone will not prevent all fraud, it’s a very good start to helping ensure that your dealership’s profitability is not being reduced due to fraud.