Occupational Fraud: A Costly Common Financial Crime

According to the Occupational Fraud 2022: A Report to the Nations, it’s estimated that the “typical organization loses 5% of its revenues each year to fraud.” That research is based on more than 2,100 cases of white-collar crime, occurring in 133 countries and includes indirect costs, such as productivity, reputational damage, and the related future loss of business.

How much could that mean to you?

Let’s say your dealership’s revenue was $10 million in 2021. That’s roughly a $500,000 loss you may never recover.

Unfortunately, even with the shift toward digital payments, remote work environments, and technology enhancements, the schemes and fraudsters are not deterred.

What is asset misappropriation and occupational fraud?

Occupational fraud is fraud committed by an organization’s employees. There are three forms: asset misappropriation, corruption, and financial statement fraud.

• Asset misappropriation is the most common occupational fraud (86% of cases). It involves an employee stealing or misusing the employer’s resources and has a median loss at $100,000 per case.
• Corruption includes bribery, conflicts of interest, and extortion with a median loss of $150,000.
• Financial Statement Fraud involves a perpetrator intentionally causing a material misstatement or omission in an organization’s financial statements. It is the least common at 9% of schemes. This is the costliest scheme with a median loss of $593,000.

Why does it matter?

In times of increased dealership profitability overall, it is easy for asset misappropriation schemes to go unnoticed. With tens of thousands of dollars transacting each month, the losses could be substantial before they are recognized, especially if you’re on a quarterly review with your accounting firm.

Examples of misappropriation schemes include:

• A company vendor calling to inquire about the status of an invoice, but the company’s accounting records show that the invoice has already been paid.
• Checks that have cleared the bank but are not recorded nor identified in the accounting system.
• Physical evidence that checks have been altered.
• Cancelled checks are missing.
• Alterations to vendor invoices.
• Unexplained changes in bank deposit slips.
• Physical removal of company’s assets.
• Payroll discrepancies.
• Lower than expected company gross revenues.
• Lower than expected company net profit.
• Higher than expected mileage costs.
• Higher than expected travel and entertainment costs.
• Processing false merchandise returns.

Example: This credit scheme posted by Chron might having you slamming on the brakes.

There’s evidence that your financing department plays bait and switch with customers’ credit scores. Misrepresenting approvals, interest rates or other aspects of deals and pocketing the difference between what customers should have paid and what their invoices actually stated can skim off your profit margins. If your used-car division caters to customers with less than perfect credit, hearing a finance manager relegate them to higher-interest loans won’t trigger the suspicion that would result if customers with high credit scores encountered the same form of downgrading. Don’t let your employees use your customers as a means of perpetrating fraud.

What should you do if you suspect fraud?

Robust internal controls are the best defense against fraud, including:

• Job rotation/mandatory vacation policies;
• Hotline or other reporting mechanism;
• Surprise audits;
• Proactive data monitoring/analytics;
• Anti-fraud policies;
• Fraud training for employees, and;
• Formal risk assessment.

It’s not only about protecting against financial losses. It’s also about surviving reputational risk. The first step is knowing if there are risks to your dealership. Evaluate your controls and have a systemic approach to protect your financial foundation.