A covenant is a contract. We make them when we ask someone’s hand in marriage, we sign one when we acquire a dealership franchise and agree to pay floor-plan. Whether informal or formal, employees make a covenant with their employer when they agree to give their services in exchange for compensation.

A covenant is a very serious thing. Yet we increasingly minimize our covenants anymore in marriage and in our financial obligations. Circumstance, public opinion and slack discipline and enforcement are making walking away from promises no trouble at all for many.

Perhaps this is why we continue to read in our daily newspapers and trade periodicals about broken covenants in this industry. Reports continue to surface about dealership controllers, senior managers and others who break their employers’ and co-workers’ hearts by stealing money from them under the guise of trust.

Should this kind of news item surprise us? Embezzlement, dishonesty and violation of trust are often perpetrated by employees most entrusted by the dealership’s owner or owners. Consider these examples against their dealership employers from just the last year:

• Pacific NW dealership: A longtime payroll manager embezzles $30,000.
• Midwest dealership: Former controller embezzles $88,000
• Eastern states dealership: Over five-year span, controller embezzles $300,000

A brief google.com search will surface many others. The question continually comes to mind when one reads such reports is, “How can this still be happening?”

You would think that in today’s world there would not be something so blatantly overt as these kinds of breaches of covenant. One reason that trusted employees in small businesses like auto dealerships can seem to steal dollars right out from under everyone’s nose – and get away with it for years – is they’re trusted above reproach. That’s the danger, which is why dealers who neglect to follow best practices in how cash is managed too often end up in media reports about employee embezzlement.

The accounting firm of Brady Ware and Company, Dayton, OH, in a recently completed survey about fraud and internal controls, reported that a third of dealership respondent had “experienced actual or attempted fraud.” Sixty-two percent of the fraud perpetrators were employees!

Utilizing good financial controls and practices is always sound business. For instance, always use a two-person reconciliation process and never leave all cash handling and deposits responsibilities with one individual. The idea is always to have a check-and-balance mentality about how dealership invoicing and receipting is managed and cash handled, checks processed, and deposits made.

Still, even with such internal controls in place, no technology yet available can discern the intentions of the human heart. The news media reports violations of business covenants all the time, from discriminatory hiring practices to employee abuse to employees who take advantage of their positions and disrespect themselves and their families and friends to steal from their employers. The best defense against individuals who might perpetrate crimes against the dealership is uncomplicated but necessary and effective.

At the core of such a defense to protect the dealership, including data theft, is to control access to these assets and to monitor their activities.

Having periodic third-party review of business practices and information technology networks should always be part of the dealerships self-protection policy.

Digital theft
While digital theft can be quite harmful, at least it’s usually not the actions of a trusted employee who breaches the dealership systems to steal. Regardless, data theft is a real threat. Dealership financial data and its customer information are valuable to identity thieves and network hackers. System firewalls protecting internal systems are a good first defense, but they do not stop professional hackers.

In today’s business environment it is not a question of “if” but when someone will breach your network.

Having your network breached is one thing. Having your network breached and not knowing about it can lead to catastrophic consequences. Foremost, it can mean loss of dealership financial and customer personal data. The FTC Safeguards Rule under the Graham Leech Bliley act mandates that the dealership protect this information from theft.

To do so, consider using a Managed Security Services Provider to monitor your network, and alert your IT staff when an intrusion occurs, so immediate action can be taken. Absent such real time network monitoring, the dealership will likely remain open to network compromise and perhaps substantial loss.

Asset theft
Not only do vehicle parts go missing from their shelves, core returns go unaccounted for, and make-ready and body shop materials “walk,” most damaging asset theft in an automobile dealership is its money.

Because opportunities to pilfer are so great in a modern dealership, no one should be free from accountability to another. Therefore, set in place checks-and-balances to give another set of eyes where necessary to thwart such activity. You might consider:

• Security cameras to watch over parts and materials inventory shelves, supply rooms, parking lots, and other outside areas to observe suspicious activities.
• Limit access to areas like inventory shelves, materials closets and parts cores storage.
• Take note of employees’ lifestyles, habits and behaviors that seem suspicious or otherwise indicate they may be living above their observable means. Employees hanging around in areas where they have no legitimate reason to do so is a red flag.
• Enforce you internal controls policies.

The Employee Handbook must spell out clearly the dealerships’ policy toward employees and that the dealership will enforce its zero tolerance toward any such unauthorized or illegal activities, regardless of who the suspected employee is. In family-oriented dealerships having long-tenured employees, too many dealer principals feel having such policies are not necessary or even perhaps aggressive.

Be aware, however, that close-knit dealerships can often have the highest internal theft frequencies. No one wants to suspect that a trusted long-time employee would or could be embezzling or otherwise committing internal theft.

Accounting and back office
Accounting and back office processes deserve special internal controls, as these functions that handle money offer the most alluring attraction for employees who might have motive (whatever the reason), access and opportunity through their position to steal.

This sort of internal theft and embezzlement happens all too frequently. Just as I was concluding this final draft, the following news came across my desk:

An office manager who had worked for a Wisconsin dealership for about 20 years allegedly stole more than $170,000 from the business over a 24-month span. According to the criminal complaint, the woman “would enter car deals on the computer, enter service charges, prepare financial statements, and at one point write checks.” Some of the checks allegedly filled her own pocket. If the ex-manager is found guilty of the charges, she could receive 150 years in prison.

The following oversight measures can help prevent this kind of theft from happening to you:

• Don’t allow one person to have complete control of bank accounts. Have one individual handle payoffs of trade-in balances and another to handle license and title activities; have a third individual handle the day-to-day bill paying. This would mean having multiple accounts.
• Conduct regular audits of the books; auditing by a third party preferred.
• Daily review the DOC or Daily Operating Control sheet.
• Investigate anything that looks different or out of place on vehicle values, bank statements, inventory balances, or number of ROs.
• Don’t shrug off any swing in profit, revenue, or payables –always investigate!
• Pay close attention to used inventory and the amount of water that exists. Market fluctuations will occur, but you don’t want to see large swings that could signal something amiss.
• Pay close attention to contracts in transit – again, this could mean something other than just waiting on Stips or stipulations, the documents required by a lender to fund a loan, such as proof of income and residence, and proof of insurance, etc.
• Personally check bank statements; randomly look for abnormalities.
• Keep an eye on used car reconditioning; if looks out of place, dig deeper!
• Conduct monthly inventory of all vehicles, used and new, and match to dollar amount on the books and/or floor-plan.

It is certainly unrealistic to expect the world to run perfectly without crime. However, the dealer can do much to control and minimize internal opportunities for theft.

Foremost, do the right due diligence when hiring – never neglect calling references and prior employers, conduct background checks, and in today’s world a credit check might be warranted as well. Make sure every employee is aware that no internal theft of any kind will be tolerated – and be sure they understand violations will result in dismissal, at least, and criminal prosecution in many cases. In some cases, having a third-party audit the dealership’s exposures will provide the most prevention and peace of mind.