Internal Control Process Recommendations

Internal controls are defined as a system or plan of accounting and financial organization within a business comprising all the methods and measures necessary for safeguarding its asset, checking the accuracy of its accounting data, or otherwise substantiating its financial statements, and policing previously adopted rules, procedures, and polices as to compliance and effectiveness.

You can break down internal controls into two categories: preventative and detective.  Our goal is to protect the business by working to prevent and detect human error, misconduct, and fraud.  

To prevent control issues with staff, you should be proactive.  Below are a few ideas to ponder:

• DMS Access. Does anyone have unnecessary access? If there are functions a staff member has but is not using, limit the access or just take it away.  How many staff have had access to something, but you said, “They don’t even know how to use it?”  This can be harmless at first, then they realize that checks are printed on a blank form, and they can now print a check on their home printer, or something equally as disingenuous.

• Segregation of Duties. Ensure that no single employee has control over all aspects of a financial transaction. For example, the individual who approves purchases should not be the same person reconciling bank statements or processing payments. When roles are clearly defined and duties are separated, opportunities for fraud or concealment of errors are significantly reduced.

• Step up your processes and be diligent about adhering to them.  For example, with check writing, since you haven’t had an issue you might think it’s okay to dismiss a question and just process the check.  Don’t pass on following your processes.  Require check requests, dual signatures, and have a verifiable trail.

• Have a secure way of exchanging additional data.  There are many tools that allow you to scan in and store information securely.  For the safety of your company, you need to be utilizing one.  Posting a deal involves important checks and balances so having a secure data exchange platform will allow this process to be much more efficient.      

• Cybersecurity and Technology Controls. As dealerships rely more heavily on digital platforms, it’s critical to ensure system security. Require multi-factor authentication for access to financial systems, establish strong password policies, and back up critical data regularly. Work with your IT provider to perform periodic vulnerability scans and ensure software updates are applied promptly.

Detecting control issues is very important. Don’t worry, it is not too late.  What are you doing currently to detect issues?  Below are some suggestions:  

• Document review.  Be diligent about reviewing the actual copies of checks at month end. And when is the last time you looked at the vendors and signatures on your month end statement?

• Reconciliation, reconciliation, and more reconciliation.  More specifically, bank reconciliations.  There are many clients that do not reconcile daily.  Although a monthly reconciliation is necessary, it’s time to step up your detective skills.  Doing a daily reconciliation can quickly identify not only suspicious transactions but human error.  You may see an out of sequence check or find a check written to a seemingly suspicious or fictitious vendor.  Finding these items daily provides you ample time for quick action.

• Journal reviews.  How often do you review entries for out of the ordinary items?  If you have a pay plan that pays out based on aged items, it is a good idea to haphazardly review entries made by the staff member being paid.  We want to trust employees, but we also want to verify that work is done properly as well as reported properly.          

• Training and Awareness. Internal controls are only effective when employees understand their importance. Conduct regular training sessions on fraud awareness, ethics, and data protection. Encourage staff to report irregularities without fear of retaliation, and promote a culture of accountability and transparency.

The overall goal is accountability, not only among the staff but among management as well.  When physical distance is between management and staff, sometimes jobs take longer, they can be put off until tomorrow, and communication breakdowns can happen.  Communication has a crucial impact on productivity.  Workers need to know you are there to help but also still in control of production.  

An internal audit program can also be a solution.  Probably more numbers have passed through your financial statements in the last year than ever before.  You likely have been working with the same staff throughout this change, and many of you are short on the staff department.  You are truly busier than ever!  It is time to put a plan in place that ensures you that you are doing the most efficient job possible.  Determine an audit period, whether it be monthly, quarterly, yearly, or a combination of multiple.  Take the time to review and understand where your risk is.  Once you have established your risk you can strategize on an internal audit plan then execute it.

Continuous Improvement

Internal controls should evolve as your dealership grows. Regularly review control procedures to ensure they remain relevant and effective. Use audit findings and staff feedback to refine processes, tighten weak points, and increase operational efficiency over time.

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