Protecting the Dealership from Vendor Fraud

As business owners, you must rely on your employees and vendors to help your dealership succeed. Sometimes, those same vendors and individuals take advantage of situations to increase their own personal profits. Vendor fraud involves payments made to actual or fictitious vendors for personal gain. It is a lucrative industry that can take tens to hundreds of thousands of dollars from your bottom line.

Types of Vendor Fraud

There is a good chance your dealership has experienced some form of vendor fraud. While there are many types, most often, vendor fraud falls into the following three categories:

• Internal employee fraud – an employee creates a fictitious vendor and bills for warranty work as that vendor, then collects the payment.
• Outside vendor fraud – a vendor falsifies purchase price by creating a fictitious supplier, allowing them to increase their mark up on the part.
• Collusion between an internal employee and outside vendor – employees receiving kickbacks for using specific vendors instead of finding the best priced/quality suppliers.

Minimizing the Risk of Vendor Fraud

Above are just a few examples of possible scenarios that could cost your dealership. Consider just how easy it would be to overlook a slight price increase or falsified third-party invoice at first glance. The good news is that internal controls can help prevent skimming or straight-out fraudulent invoices. Here we outline some steps to take to help minimize the changes of vendor fraud.

1. Regular vendor audits will allow your dealership to dig into contracts and invoices and ensure everything is straightforward and aboveboard. While annual financial statement audits may take place, the purpose of an audit is not meant to identify issues of vendor fraud. That being said, when completing a vendor audit some additional steps can be taken to aid in identifying possible fraud, including:
   1. Examine tax filings for any Form 1099’s sent to your employees for ‘consulting fees.’
   2. Review freight invoices for unbilled and undelivered merchandise.
   3. Look at vendor-related party transactions.
   4. Review invoices as compared to the original contract signed.
   5. Visit vendor facilities to make sure they exist.
   6. If needed, consider working with fraud specialist.
2. Establishing a thorough process for vetting and approving vendors allows management to understand potential concerns before signing any contracts. This may include
   1. Building a right-to-audit clause into contracts as a standard practice.
   2. Creating a Request for Information (RFI) that outlines the types of vendors you are looking for, what you need to be supplied, the price per unit you want to stay within, and delivery timeframes.
   3. Asking employees for any feedback on vendors they have worked with in the past.
   4. Organizing vendors, including the information you have collected and where they are in the approval process so that all information is in one easy-to-locate spot.
   5. Considering a software system for managing approved vendors.

While it may be easier to stick to how things have always been done, spending the time to put controls in place to prevent potential instances of vendor fraud is a necessary practice for protecting the dealership.

Contact Us

If you need assistance building out or implementing the processes, conducting a thorough audit of your vendors, or other follow up based on the information outlined above, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.