Ask any dealer what breakdown in business operations is most feared, and you will likely hear the word “fraud” in the answer. From the back office to the parts department and beyond, dealers face a very real threat from those few employees who do not have the best interests of the business in mind. In fact, an unscrupulous employee bent on squeezing out personal profit at the expense of the dealer can cause significant, lasting damage to an organization’s reputation and future viability. For the hands-on dealer, and for the dealer with the big picture approach to management, keeping fraud in check is not only possible, it is vital for long-term success and for peace of mind.

Operational Audits:
A Must For Fraud Control

The best way to keep track of each of the elements of your business that can be typically considered a target of fraud is to conduct regular operational audits. Each year, most dealerships typically carry out an annual financial auhdit to fulfill the requirements of a financial institution, manufacturer or investor. While these audits are important, the fact is that internal operational audits can offer a dealership additional, vital insight into operational performance. While not a requirement, you should consider this form of an audit a necessity, as well.
The primary focus of an internal audit is to improve dealership operation as a whole, but it is above all an important tool to detect fraud. The goal is to align dealership operations with ownership’s objectives. Unlike a financial audit, an operational audit is able to focus on specific departments or issues. It can vary in scope and may be performed by in-house personnel.

The following are key factors that you should consider when establishing a plan for an internal operational audit.

Electronic Data Archiving
If you are not currently archiving data electronically through your DMS provider or an outside service, you should start to do so immediately. It is very important to have data stored electronically in order to enable future research, data mining and exception reporting. Also, through data archiving, the internal audit function becomes automated and more efficient.


Document Policy
Since department managers will be held to certain measurable standards, it’s important that they be made fully aware of these standards. This is completed by various means, such as the establishment of a “delegation of authority” policy where managers acknowledge the scope of their responsibilities and authority. There is also the use of monthly representation letters or checklists. These are monthly disclosures that list departmental responsibilities or expectations, which each manager should sign-off on. Finally, there is the development of a Policies and Procedure manual.

Balance Sheet Integrity
The first internal audit should work similar to a financial statement audit in that every balance sheet account balance needs to be validated. Since all operations manifest themselves through the balance sheet in one form or another, the first internal audit needs to establish an in-depth knowledge of the balances in each account. Unreconciled accounts or aged balances that go unmonitored are a haven for fraud and incompetence, both of which can be costly.

The Internal Auditor
It is important that you select an experienced internal auditor to conduct the review. This individual should be impartial and have a working knowledge of dealership operations, in order to ensure the detection of operational inadequacies.

Commitment to Process
Internal operational audits only serve a true value if there is a commitment to implement change. Department managers must embrace audit outcomes and recommendations, particularly the controller and general manager who have the greatest influence on the adoption of policy.
Once an operable plan has been established, a dealer can then choose to focus audit efforts in the areas that may hold the greatest opportunity to drive dealership profits. Keep in mind, no area of the dealership should be off-limits to review.
Whether you go it alone or outsource, there is truly no limit to the enhancements that an internal operational audit can have for your organization. Over a period of time, dealerships that have a committed internal audit process have seen the long-term benefits of a well run, fraud-free dealership.