News/Publications

Vendor reviews: A Valuable Fraud Prevention Tool

September 21, 2018

Your dealership works with a wide range of different vendors, ranging from auctions and ad agencies to parts suppliers and reconditioners. Given the importance of these relationships to your success, it’s a good idea to take a fresh look at the companies you do business with.

Performing vendor reviews can help ensure that both your dealership and your vendors are still benefiting from the arrangements. In addition, it can help uncover possible vendor fraud.

Fraud comes in a variety of cons

Dealerships can be victimized by vendor fraud in many ways, including by employees participating in car auctions.

In one auction fraud scheme, a dealership employee purchases a vehicle but doesn’t pay for it at the window. Instead, another dealer pays for it and the employee buys the car or truck from him at a higher price than the auction price. The employee is then paid some, or all, of the difference from the dealer who bought the vehicle.

In another auction fraud, buyers form relationships with wholesalers and receive kickbacks for purchasing their vehicles. Both types of vendor fraud result in dealerships paying more for used cars at auction. This results in inflated inventory and can make it harder to realize a profit on used car sales.

The parts and service department also can be vulnerable to vendor fraud. For example, parts department managers have been known to receive kickbacks from suppliers for buying from them. In another scheme, a service department manager sends warranty repairs to a fictitious vendor, bills the warranty company for the repairs in the name of the fake vendor, and then pockets the warranty payment.

Comprehensive reviews uncover schemes

One of the best ways to guard against these types of fraud is to perform a comprehensive vendor review. This can help uncover hidden vendor fraud schemes that are costing your dealership tens or even hundreds of thousands of dollars a year.

Here are a few guidelines to keep in mind when conducting these reviews:

Include a right-to-audit clause. This should be a part of your vendor contract or purchase order. The clause should state that your dealership (or your designated representative) has the right to examine all documents related to the contract. It also should stipulate that the vendor will provide them within a reasonable period.

Perform a physical tour of vendor facilities. Dealerships can go years without ever setting foot on a vendor’s physical premises. Paying a visit to your vendors can be highly revealing.

Take this example: During a site visit to a parts supplier, a dealership owner discovered that the “vendor” was really a shell company with no facilities, equipment or employees. The scammer was working with an employee at the dealership to funnel parts orders from a legitimate supplier at inflated prices.

Look for vendors’ related-party transactions. Vendors that work on cost-plus pricing agreements can use related-party transactions to mark up the price of their goods. For instance, by forming a dummy supply company that’s supposedly marking up its parts, a vendor could increase its own markup to your dealership exponentially.

Examine vendors’ tax filings. Vendors have been known to disguise kickbacks to unethical dealership employees by issuing 1099 forms to the workers that label the payments as “consulting fees.” If it’s part of a vendor audit agreement, you can ask your vendors to review their vendors’ 1099 forms to see if any are being sent to your employees.

Look carefully at vendors’ freight invoices. A common vendor fraud involves billing for undelivered merchandise. In a typical scenario, a dishonest employee will sign receiving documents for undelivered parts and get a portion of the value of each false shipment from the fraudulent vendor. Ask vendors to see invoices or bills of lading for a sample of parts deliveries, and then compare them to what was actually delivered.

Consider hiring a Certified Fraud Examiner (CFE) to help with your vendor fraud review. This professional is highly trained in techniques like these that can detect and prevent fraudulent vendor practices. Also think about using data analytics on vendor activity and payments to determine inconsistencies or trends in activity.

Keep relationships strong

Both your dealership and your vendors have a vested interest in maintaining a mutually beneficial relationship. Conducting vendor reviews is an effective way to keep these relationships vibrant and strong while also guarding against vendor fraud.

Examining vendor practices helps answer critical questions

A vendor fraud review can help uncover fraudulent practices by revealing the answers to several important questions about vendors, including:

• Are the hours that vendors charge to perform work for your dealership sufficiently documented and reasonable for the work being performed?

• Can vendors supply invoices for all materials used as part of the service they’re delivering? Are the invoices from companies independent of the vendor and do they reflect actual vendor costs?
• Can vendors produce freight bills to support the delivery of parts and merchandise to your dealership?

• Do vendors’ tax filings include 1099 forms issued to any of your dealership’s current employees?

Last, visit your vendors’ facilities. Do they appear capable of delivering the services or providing the goods they’re contracted for?

© 2018