By Jeff Forsberg, CPA
Partner with Peterson Sullivan LLP
Every profession has its own jargon and the world of accounting is certainly no exception. For example, dealers have “flooring,” “bushing,” “spiffs,” among others, and we have words like “internal controls,” “separation of duties” and “employee defalcation.” Accountants’ terms are often less colorful and descriptive, so to keep the glaze from forming on your eyes, let’s use “loss prevention” in this discussion about theft.
Think theft is not happening at your dealership? A recent study estimated that dealerships lose approximately 2% – 3% of its total annual revenue per year to cash theft and mishandling of assets by employees. Dealerships are especially vulnerable because they often lack the controls found in larger organizations with internal auditors (although as we’ve seen this is no panacea either). And the “out-of-sight, out-of-mind” nature of employee theft usually means that any efforts to prevent it are taken only after the discovery of it. Sometimes theft comes to light by sheer dumb luck, but it’s more likely that theft is discovered by functioning loss prevention procedures.
An understanding of factors that lead employees to become dishonest is necessary. Research in the area of fraud has identified three things that usually exist when fraud occurs:
Opportunity exists if an employee thinks he or she can get away with it. It’s useful to be reminded of the adage “crime is 10% motivation and 90% opportunity.”
- Motivation may exist because the employee has cash demands to support a drug habit, “living large” habits, and/or greed.
- Rationalization can occur if the employee was declined a promotion, pay raise, etc. –your imagination can run with this one.
Disrupt any of these factors and your risk goes down. Of the three, the dealer has the best chance to lower the “theft threat” by taking away the opportunity. This means putting effective theft prevention routines in place and your employees know that they are. These steps are rarely given the same priority as customer satisfaction, but the potential impact of theft to the bottom line can be as significant.
Motivation and rationalization factors are more difficult to evaluate when hiring employees. Unfortunately, often times the particular employee caught stealing from you is the biggest surprise. Would anyone suspect Winona Ryder as a person who would shoplift? A sobering fact is that employees caught stealing can be trusted, senior employees. Worse, it’s a sad truth that the more senior employee, the greater the loss. Does this mean you should adopt airport security measures and distrust everyone? Clearly the answer is no, as trust is invaluable to healthy employer-employee relations. However, blind trust is a mistake. When Reagan and Gorbachev met for nuclear disarmament talks in the 1980’s, the operative protocol was “trust, but verify.” So should you. Mentioning Winona, Reagan and Gorbachev in the same paragraph is as unlikely as the possibility that theft has not happened to you.
Feeling porky about the strength of your dealership’s controls? Call me for a complimentary 10-point test to check if you’re justified feeling that way. Any “No” answers to simple theft prevention steps suggest your dealership is assuming more risk than necessary.
We recommend that loss prevention procedures be reviewed annually, or more frequently if there are specific concerns about certain employees or questionable activities. In the case of theft and loss, an ounce of prevention is worth a pound of cure.
Finally, it’s no secret that the most successful dealerships have the best employees. Your chances to land the honest ones are enhanced when you:
- obtain references from past employers
- require applications from all prospective employees
- obtain a credit report (employees with bad credit are a bigger threat)
- perform drug testing
- request a criminal report, when appropriate, and
- bond employees when it makes sense to do so
See your attorney first to learn how to legally implement the above hiring procedures. In matters of hiring the best employees, your “gut instincts” may be better suited to ordering lunch.
