The Wheel of Misfortune

Could the gambling habits of one of your employees add up to a big loss for your dealership? Consider these offenses committed against dealerships last year alone:

With the proliferation of casinos and online gambling seemingly everywhere today — even from workplace PCs — the risks to business from employees with gambling problems may present a real economical danger to your dealership.

Part of the problem may be the nature of gambling itself. It can become easily addictive. It can take a toll — lost income, family, home, vehicles, and jail — and for too many unfortunate dealerships in which a gambling addict is employed, loss of a significant amount of the treasury.

That your dealership is family-owned or family-oriented may, in fact, make your business even more prone to employees taking advantage of you through embezzlement and other frauds, whatever their motive.

Gambling in the workplace is a problem with enormous potential to affect the business owners themselves as well as everyone employed there.

Where a gambling habit results in internal fraud, it is most always a crime of opportunity. In cases where it is active in car dealerships, those involved are most often those who handle the money.

“Owners can't check on everything and a smart thief knows what the owner and the CPAs who audit their dealerships aren't looking for,” says Ed McMillan, a certified public accountant and expert workplace fraud.

He often gives speeches to individual dealerships and state dealer associations to highlight awareness of internal fraud and how to prevent it from happening.

“These crimes are due to individual weaknesses, and they happen in all businesses, committed almost always by those who handle the money,” he says. “And they're most always committed by an individual the owner trusts.”

Embezzlement to feed a gambling problem is certainly a crime of opportunity. Those in dealerships who handle the money and who are inclined to gamble can do so without leaving their office.

The nature of the car business itself plays a role in creating the kind of environment that makes this type of embezzlement possible. Kathleen Shea, a clinical psychologist in Libertyville, IL, cites some reasons.

“Sales is a tough business populated with sophisticated people very good with numbers who by making a presentation with a smile, handshake and shrewd customer observations make a lot of money for themselves and their dealerships,” she says.

Some savvy owners try to provide an escape of the entire ordeal and potential negative publicity by asking the betrayer to return the money to avoid legal action, she says.

Of the 300 fraud offenses McMillan has looked into “at least 98% of them were committed by someone in accounting.”

“Fox Guarding the Hen House”

Shea says that, when occupied by the wrong person, the chief financial officer's position is like “the fox guarding the hen house.” It offers the access/opportunity criteria for embezzlement.

The warning signs are usually there, but often ignored or rationalized away. It can be quite difficult to suspect a trusted employee.

“It is often the 25-year employee, those closest to the owner, who is very skilled in illusion and presentation and very close to the opportunity to pad their pocket without anyone noticing,” Shea says.

Other people don't notice, and sometimes do not want to notice, she says. “It is a personally painful process to discover someone that you trusted committing crime in your family-owned business.”

In Retrospect, There Were Signs

A spokesperson at one of the aforementioned victimized dealerships says that, in retrospect, there were red flags warning of possible criminal activity. One of them was the CFO's refusal to accept help for his workload.

“Where fraud is discovered it is often being committed by an individual the business considers above suspicion,” says Dave Cameron, a risk management specialist with Federated Insurance, which insures dealerships.

Fortunately for the businesses where these frauds are perpetrated, the losses may be covered if the dealership carries fidelity (employee dishonesty) coverage. Cameron notes that his company hasn't suffered many gambling-related losses. “But this could be a growing thing in the future,” he said. “We look for trends that might pop up.”

Checks and Balances

A checks and balances system is always a good idea. Owners can create a pattern-interrupt environment in their stores to help prevent internal fraud.

Show up unannounced in your accounting department, stop procedures and establish new ones (you take the deposits to the bank one day) and continually check up on the staff.

“Showing up for work when and where no one expects you to be is good prevention,” Shea says. “Thieves thrive in unstructured, unsupervised environments.”

Always require two signatures on checks. McMillan recommended that the chief financial officer never be allowed check-signature authority. Require an independent review of bank statements, meaning if the CFO reviews the statements review them yourself as well.

“Most important, have a good relationship with an independent CPA firm that is experienced in reviewing controls and suggesting improvements,” McMillan says. “And take those improvement suggestions seriously,”

He recommends any such suggestions should not be delivered to the CFO or accounting personnel by the dealer principal, but rather be drafted by the auditing firm in a letter to the dealer principal.

“Often suggestions to improve controls can be insulting to individuals like the CFO,” McMillan says. “If I were an honest check signer and my owner told me he was taking me off check signing I too would be offended.”