An attorney friend was pleading for help in connection with a dealership embezzlement case. The dealership's former controller had embezzled $1 million over a two-year period.

A number of judgment errors caused the dealer to incur a substantial loss from the incident. The facts in the case present a perfect textbook example since the loss could have been avoided by taking a few simple measures.

The dealer carried a bonding policy with a reputable insurance carrier for $250,000. Deadly Sin #1. For a dealer with a volume of $50 million, this amount of insurance is hardly adequate because that amount of money can flow through the dealership in one day. Be realistic when picking up the amount of insurance coverage needed. Such coverage should be set using a matrix of facts that weigh other safeguards in the system and how long such an irregularity can go undetected.

The dealer relied and trusted his long-time controller too much. Deadly Sin #2. Since the dealer was often away from the store on trips, he didn't want his absence to cause any bottlenecks, so he allowed his controller to sign the checks alone. Regardless of the circumstance or situation, allowing one signature on checks is a bad idea. The psychology of requiring two signatures creates an atmosphere of caution and prudence that usually deters illegal acts by employees.

Make sure these checklist items exist at your dealership:

  • Tell your bank not to honor any transfer of fund requests unless the order is signed by the dealer.
  • Prohibit the practice of cashing checks out of cash receipts.
  • Reconcile the bank account in a timely manner by someone independent of the check signing or recording functions.
  • Limit and control all storage and access of blank checks.
  • Log mail receipts and make sure they are reconciled to the daily deposit.
  • Perform monthly audit steps on a random and limited basis by an internal or outside accounting firm.
  • Review all journal entries done by office staff on a regular basis.
  • Maintain a job description for every staff position and ensure routine cross training for a backup system.

Jacob Cohen is a managing director in charge of the Automotive Services Group in the Baltimore/Washington, D.C. offices of American Express Tax and Business Services. Phone: 410-308-5665/e-mail: Jacob.J.Cohen@aexp.com.