Pub. 4 Issue 2

15 Issue 2 2017 A Good Starting Point While there are many means of fraud prevention, start by tightening up your internal controls. For example, many dealers fall into the trap of either “smoothing” earnings throughout the year, holding on to “rainy day” accruals, or reclassifying certain income line items to make their numbers look better. This practice makes it tougher to analyze monthly financials and may cloud the ability to detect anomalies. As such, accurate, up-to-date financial information of your dealership is a primary element of a strong internal controls function and may help you detect fraud early. Dealerships often lack a sophisticated internal controls system, as many dealers’ budgetary priorities and time don’t accommodate its implementation. However, the benefits often outweigh its cost, as the expenses associated with fraud response measures (not to mention the dollars lost from the fraudulent act itself ) are damaging. What Does My Internal Controls System Look Like? While a thorough internal controls assessmentmaybe a good idea, regardless of how well you think everything is running, there are several signs you can look for that indicate weaknesses. Key indicators may include, but are not limited to: • Lackof segregationof duties, specificallyaroundhighvalueassets or assets easy to get “legs,” such as cash and parts. • Lack of a timely reconciliation process and review on key accounts • Outdated computer/software systems • An accounting department that doesn’t post daily transactions (including new/used vehicle sales, cash receipts, repair orders, invoices, etc.) • An accounting department that consistently produces balance sheets and income statements late • Inconsistencies in journal entries or frequently adjusted entries • No real-time access to checkbook balances and accounting information effective as of the prior day’s close of business. • An accounting department that doesn’t timely reconcile intercompany or related party transactions. What Can I Do? Fortunately, there are various immediate action items youcan take to strengthen your dealership’s controls and deter fraud. 1. SegregationofDuties. Avoid the blurring of roles. Specifically, do not grant employees who record and reconcile transactions access to reconciled assets. Reconciliation should be prepared by someone who is not involved in banking duties and does not have access to accounting records. There are steps you can take without adding additional resources, such as owner involvement. The best way to prevent and detect fraud is for the owner to be involved in the financial statement process. It should be noted, however, that segregation of duties doesn’t work well with close friends, so consider the effect of relationships here. 2. Reconciliation Process. It’s imperative to have a recurring, formal reconciliation process of all the key accounts with a review. Informing employees that accounts will be reviewed and reconciled (and that differences will be investigated) can be a preventative measure. 3. Checks andBalances.Mark inyour calendar a fewrandomdays throughout the year to perform inventory counts. Don’t let the individual performing the inventory have an inventory listing or reconcile back to the accounting records. 4. Electronic Transfer Review. As wire transfers leave no paper trail, they are a favored method of fraud. As such, review these transactions regularly and make sure the payments are supported by some form of documentation. 5. Journal Entry Review. Aim to review general journal entries eachmonth. Be on the lookout for large and unusual amounts, such as entries to parts inventory, cash entries, anything that affects profit and loss accounts. It’s always good practice to limit themanual journal entries that post to the general journal. 6. Review Canceled Checks. Review the front and back of the checks and let employees know you are doing this. 7. Testing and Check Ups on Controls. This is highly effective when performed unannounced.