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  • Writer's picturePhil Villegas

Occupational Fraud Insight From the ACFE Report to Nations

By Marilou C. Vroman, CPA, CFE

The quantity of dealers who have annual financial statement audits has been decreasing over the years, and yet we still find dealers who believe their year-end review or audit of the financial statement is sufficient and designed to detect fraud in the dealership. While fraud may be detected in the review or audit process, it is not likely. Thresholds for materiality tend to limit visibility to the details, and the scope of work is focused on whether the financials are fairly presented and free of material misstatement, not whether occupational fraud exists.

As a Certified Fraud Examiner, I review the Association of Certified Fraud Examiners semi-annual “Report to the Nations” (“Report”) which shows statistics on global occupational fraud stemming from thousands of fraud cases. Some key findings disclosed in the 2018 report from 2690 occupational fraud cases are quite eye-opening:

· Internal control weaknesses were responsible for over 50% of frauds.

· Fraudsters with longevity (over 5 years) stole twice as much as newer employees.

· The median loss per case for small businesses (<100 employees) was $200,000.

· The majority of fraud victims recovered none of their losses.

According to the ACFE Report, only 4% of the fraud cases were detected through a financial statement audit. Interestingly, some of the best ways to detect fraud can be the least costly relative to the risk. Some of the most effective measures to detect occupational fraud are:

· Tips from internal and external sources – 46% of cases were detected by a tip. Enabling open lines of communication about potential fraud without repercussion is key. Individuals with integrity are more likely to report another individual’s fraudulent behavior if there is no risk to their own position or personal welfare.

· Data monitoring and analysis – The DMS is rich with transactional and behavioral information and may reveal anomalies stemming from fraudulent behavior. We often say in our internal audit process: “where there is smoke, there is fire.” Monitoring of exception reports and analysis of data trends are key in identifying inappropriate or fraudulent behavior.

· Internal & surprise audits – Establishing a system of periodic and/or surprise audits of petty cash, parts bins, vehicle inventory, bank statements and account reconciliations for example, will keep the potential fraudster on their toes and second guessing whether to make their next move.

· Behavioral Red Flags – Educate your personnel on key fraud red flags to watch for such as an employee living beyond his means, financial difficulties and requests for loans, close relationships with vendors or customers, refusal to delegate or take time off to name a few.

Statistics reveal proper preventive measures can significantly reduce the risk of fraud and are less costly than the frauds they are designed to prevent. With over 50% of frauds stemming from weak internal controls, it is vital to create an internal control environment with strong “tone at the top,” clearly defined and enforced from the Owner to the store’s General Manager, CFO /Controller, and to all other employees. Fraudsters know how to find the weakest link in the control environment and will take advantage of it once found.

Remember, a child is more likely to steal from the cookie jar when no-one is watching. Who’s watching over your dealership’s cookie jar?

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