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  • Writer's picturePhil Villegas

Mandatory Vacations - A Good Internal Control or Just Textbook

By Marilou C. Vroman, CPA, CFE

As controllers, CFOs, and dealership auditors, we have heard it many times before – “Require mandatory vacations as a good form of internal control.” As with many things in life, the textbook version makes perfect sense to do. But should this be a part of your dealership’s employee manual?

Mandatory vacation is great from the standpoint of encouraging your employees to take time off to rest, spend time with family and find work-life balance. Mandatory vacation as an internal control is built on the premise that if an employee is performing certain acts which may be deemed inappropriate, risky or fraudulent, these acts could be discovered or surface while that individual is on vacation. Essentially, the employee’s daily pattern of behavior gets disrupted. On the surface, the mandatory vacation makes perfect sense, but as you dig deeper, this policy may not be as effective an internal control as one may think.

Some of the considerations in the effectiveness of mandatory vacations:

Cross Training – when the individual goes on vacation, will another employee actively take their place? In other words, has another individual been effectively cross trained to cover ALL the necessary functions of the vacationing employee? All too often, work tends to “sit” on the desk until the vacationing employee returns to work. The matter might remain unaddressed until the vacationing employee returns only to say, “There is nothing wrong with what you saw – just disregard it.”

SubordinationIf something appeared unusual, would the cross trained employee be in a position to say something to the vacationing employee’s immediate superior? Would they rather stay quiet for fear of retaliation? Would they be willing to risk loss of their own job or relationship with that employee in the event of a false accusation?

Lack of knowledge - Would the cross-trained person be knowledgeable or experienced enough to recognize if something was wrong in the first place?

These are all considerations where fraud may be occurring but will not necessarily be detected while the employee is on vacation. Ultimately, the return on investment should be evaluated - what effort will it take to effectively implement and enforce this vacation policy in a way that it is effective?

Vacations are undeniably a form of internal control, however, the best return on investment still comes from implementing and enforcing strong day to day internal control procedures and “tone at the top”. Let people know you will continuously inspect what you expect, not just when they are on vacation.

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