Contrary to the necessity of external audits to maintain compliance in this heavily regulated industry, many dealerships forego placing emphasis on the importance of securing a well-oiled internal audit function. Internal audits fall into the “not required” category; therefore, many dealers are averse to allocating resources towards what they might consider to be a superfluous service.
Nonetheless, performing internal audit procedures is pivotal in any dealership’s preservation of reliable internal controls. Without sound controls, dealers face many risks from within their own organization.
Don’t Be Caught With Your Head in the Sand
Given the rapid rate of evolution that the dealership industry has sustained – between the rise of franchise dealerships, gross profit fluctuations, advancing technology and more – the demands dealers face continue to accumulate. Thus, the increasing difficulty to stay on top of daily operations is understandable. However, this is the exact reason it is, now more than ever, imperative to establish solid internal controls to be able to lean on amidst the industry’s oftentimes-chaotic growth and change patterns.
The cost of control deficiency far outweighs the cost of internal audit implementation, as dealerships have lost hundreds of thousands of dollars due to various internal weaknesses, including (but not limited to):
- Fraudulent financial reporting
- Misappropriation of assets
“The owner/dealer should shift his/her focus from identifying problems to facilitating organizational betterment, which will in turn create a trickle-down effect…”
Top 10 Internal Audit Considerations
All dealerships may benefit from internal audit implementation, and while trusting in an industry advisor to assist is helpful, there are plenty of tips and “to-do’s” that dealers can employ without having to spend the extra money. Dealerships of all sizes may find these tips advantageous; however, smaller groups and single-point dealerships are likely to find the most immediate value in the below considerations, as they will be easier to oversee across the entire organization.
- Identify one person in the accounting department and schedule him/her to perform varied internal audit projects at least one day per month – even more optimal would be one day every other week. Note that these projects should be outside of the accounting department (or any area for which they are responsible or oversee). Ideally, this individual should be a high-achiever who seeks more responsibility.
- The internal audit function should report to and work directly with the owner or dealer (depending on the size and structure of the dealership, this could be the COO or CFO as well). It is important for the authority figure in this scenario to demonstrate “tone at the top” as to encourage organization-wide respect for the internal audit process/function. Furthermore, the owner/dealer should shift his/her focus from identifying problems to facilitating organizational betterment, which will in turn create a trickle-down effect that will innately help address issues.
- Start with a small agenda for your internal auditor. Providing him/her with a laundry list of tasks may be too burdensome and exhausting that he/she might be tempted to throw in the towel altogether.
- Be innovative with this role. Rather than focusing on the basic and accepting satisfactory results, connect the internal auditor with an employee from a larger dealership group with whom he/she can collaborate and share ideas and hot issues.
- Enforce segregation of duties. Enabling employees to wear too many hats can create an inviting environment for occupational fraud. For example, it is a best practice to segregate the responsibilities of the cash receipts process by not allowing the employee who is responsible for the receipt of cash to also prepare the bank reconciliation.
- As the owner/dealer, hold yourself accountable for keeping your financial information detailed and constantly updated so that spotting anomalies in your monthly financial analysis doesn’t become a challenge. Embedded in this tip, of course, is an additional tip of making sure you analyze your financials on a monthly basis.
- Perform surprise inventory counts a couple times per year. Avoid disclosing this plan to any of your employees.
- Regarding information technology and data security, require employees to change their passwords on a regular basis (quarterly or semi-annually). Furthermore, consider physically changing locks when a manager-level employee (or higher) leaves or is terminated from the dealership.
- Leverage the DMS (or other third party software within the dealership). There are a number of useful reports and products available from which the dealership may greatly benefit.
- Be alert of your employees’ lifestyles. Particularly, maintain awareness of their lifestyles, habits and potentially suspicious behavior that may indicate living beyond their means.
Sleep Better at Night
If the ongoing headlines of dealerships suffering from detrimental losses due to internal weaknesses are keeping you up at night, consider establishing a well-defined internal audit process. While larger multi-store groups and mega-dealers may find the most tangible value in enlisting in the service of an advisor who has the expertise and bandwidth to provide a thorough, organization-wide internal audit and objectively report findings and remediation recommendations, smaller dealership groups and/or single-point stores should strongly consider integrating the above tips into their internal controls routine immediately. Please note that doing so does not guarantee fraud prevention or deterrence of other internally-related mishaps; however, it is a solid step in the direction of an effective internal audit function, which may improve your odds of not falling victim to the headlines and help you sleep more soundly.
Author: John Seymour
John Seymour is an Assurance Senior Manager with DHG Dealerships, whose practice serves 2,500+ dealership clients nationwide, including 6 of the Top 10 U.S. groups.Email: email@example.com.