Protecting Your Auto Dealership From Employee Dishonesty Losses

When meeting with dealers, it is common to hear about all of the losses due to “hands in my pocket.” If you have not experienced it, it is difficult to believe that one of your trusted staff members could be stealing from you. One study estimates that an average business loses six percent of its total annual revenue to theft involving employees. Statistics further indicate that one in five dealerships has an ongoing employee-related claim issue. Sound practices involving the prevention of employee dishonesty losses and adequate insurance coverage are obviously an important part of protecting your bottom-line.

Often these incidents can involve one or more staff members. History indicates the profile of an internal thief to be an individual with seven or more years of experience at the dealership — employed in a position of trust. These individuals develop elaborate schemes, and the schemes evolve and expand over time. It is generally greed that brings a claim to light; if the amounts were not to increase, or the circumstances not to change, the incidents may have gone on unnoticed. The claims that we have seen run the gamut from fraud; fake employees; fictitious accounts payables; and the blatant theft of cash, parts, or supplies, to embezzlement. There appears to be no end to creative thinking when it comes to stealing from one’s employer.

Dealers that have suffered an employee dishonesty loss are often times embarrassed, and thus the story is not shared with colleagues, or even within a dealership group.

It is important that the facts of these cases are documented in an effort to combat similar events from happening at other stores. I recall on more than one occasion visiting a dealership, and learning that an individual who had been responsible for an employee dishonesty claim at another dealership was now under their employ. While proper screening will not always prevent you from hiring the wrong individual, it should be your first line of defense. There are a number of companies across the country which can provide background checks and pre-employment screening services. We recommend that these services be utilized, especially when hiring someone in a position of trust.

Employee dishonesty claims are often hard to detect, and even more difficult to prove.

In general, we see the need for forensic accounting and a complete criminal investigation. The process itself can be complicated by the fact that incidents generally span a number of years.

Here are some general rules to help prevent employee dishonesty losses:

• Complete background checks to include reference checks.
• All cheques or fund transfers over $5,000 should be countersigned.
• Bank deposits should be made daily, or as required by two staff members.
• Bank deposits and reconciliation should never be completed by the same individual.

As a Dealer Principal, being active in all departments at your dealership on a regular basis is a good defense against employee dishonesty losses. While there is no failsafe way to protect your business, here are some additional risk control steps every dealership owner should consider:

1. You should collect and open all mail on a regular basis.
2. Conduct a regular sales audit. At least four times per year, pick a random deal and follow it from start to finish including used trade-ins and their dispositions, all finance and insurance (F&I) transactions, all aftermarket additions, any related dealer trades, and all cheques associated with the deal.
3. One regular parts audit to include the opening of all large or costly boxes.
4. Promote inter-departmental audits within all departments; new, used, parts, body, F&I, and accounting.
5. Obtain RCMP criminal record checks, and credit reports on all new hires in critical positions. Often times a financial record check will reveal more than a criminal record check.
6. Check references in writing, and by phone for all new hires.
7. Monitor all staff for logging of excessive hours, not taking vacations, no sick time, late or confusing paper work, staff in-house purchases, lifestyle changes, and rumours of substance abuse or gambling.
8. Monitor all wholesalers or curbsiders, and limit (or eliminate) their access, if possible.

Should you have any questions or concerns with someone in your employ, it is best to seek legal advice immediately. Then contact your insurance broker to discuss your employee dishonesty coverage.