dealerdetails...dealerdetails dealerdetails introduction: it seems like no two fraud cases are ever...

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F o r E x e c u t i v e s o f A u t o m o b i l e D e a l e r s h i p s

DealerDetailsO’Connor & Drew, P.C.

has been providing

accounting, tax and

business consulting

services to the automobile

dealership industry for over

50 years. Our passion for

dealerships is the hallmark

of our commitment to

the industry. We have

built our firm on the trust

and integrity we have

earned from automobile

dealerships of all sizes

throughout the country.

In This IssueDealership Fraud –

It Comes in All Shapes and Sizes

You Are Going to Pay More Medicare Tax in 2013

Have Your Expenses Begun to Creep Up?

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Have Your Expenses Begun to Creep Up?Suddenly, your financial statement indicates that your bottom line is either shrinking or not growing at the level you would expect. How could this be happening? Have you been lax on watching your expenses? Have you been buying services or products that are really not needed? Are you retaining less gross income? Let’s look beyond personnel and advertising costs. Below are ten expense-cutting ideas to consider in order to maintain or increase your profitability:

1. Review telephone, cell phone and internet contracts. Renegotiate costs and contracts with service provider.

2. Review shop policy expenses weekly.

3. Negotiate trash charges. Consider larger dumpster with fewer pickups or implement a recycling program.

4. Make staff aware of expenses. Consider rewarding staff for expense reduction ideas.

5. Initiate or review an approved vendor list. Review purchase orders and communicate to the selected approved vendors why they made the list.

6. Review all CRM products, contracts and licenses to see if there is any duplication or overlap of service.

7. Charge deals for CRM costs.

8. Have DMS bills reviewed. Consider lower cost providers.

9. Eliminate overtime.

10. Negotiate shop uniform contracts. Verify uniform cancellation on terminated employees.

July/August 2013 – Volume 16

DealerDetails DealerDetails

Introduction: It seems like no two fraud cases are ever the same. During the fall of 2012, we investigated two cases that on the surface looked completely different. The perpetrators in these cases range from both ends of the spectrum: the first involved an unassuming mother of four while the second involved a smooth talking con artist. One involved a low level employee and the other a manager. One lasted almost five years while the other less than a year. The lone commonality between the two cases was lack of segregation of duties that provided the opportunity for the fraud schemes to occur.

Fraud Case #1: In September 2012, the controller of a New England dealership noted outstanding balances in the cash sales account totaling approximately $200,000. After investing countless hours into investigating the discrepancy, it was concluded that the cashier, who was responsible for collecting the cash and applying it to the customer accounts, was lapping payments by applying current payments to older balances, which had previously been paid. She was also posting accounting entries to transfer balances between the cash sales account and various parts and service receivable accounts on a monthly basis to conceal the fraud.

Fraud Case #2: During the fall of 2012, the office manager of a small domestic dealership noted an outstanding balance on the vehicle receivables schedule due from a customer for approximately $5,500 dating back several months. Upon being questioned about the outstanding balance, the finance manager produced a check the following day for the aforementioned amount and gave it to the office manager. However, the account holder on the check did not match the customer that purchased the vehicle. The check was subsequently returned due to insufficient funds. The owner received a copy of the insufficient funds check and contacted the customer. The customer attested that she paid the $5,500 balance at the time of delivery in the form of a check made payable to the finance manager at his request. After

numerous hours investigating the incident and others like it, which included calls to customers to confirm payments, it was determined that the finance manager misappropriated funds paid by customers for the sales of vehicles in excess of $30,000. It is our belief that the actual defalcation was significantly larger as we uncovered evidence confirming that the finance manager, in some instances, altered the purchase and sales agreements subsequent to the transactions in an attempt to conceal his actions.

Common Problem: In both situations, the dealerships internal control systems failed to segregate the custody of the asset from the ability to record accounting transactions. In Case #1, the cashier collected the cash and also posted the receipts to the customers’ accounts on the general ledger. In Case #2, the finance manager also collected the payments from the customers and billed the paperwork for the deal, which subsequently was posted to accounting. These types of scenarios are prevalent in the automotive industry. We consistently see sales or finance managers collect deposits, service advisors collect payments for repair orders, and cashiers post entries to accounting. Additionally, it is common for the cashiers to bring the deposit to the accounting office, at the end of each day, to be counted and reconciled by a member of the accounting office.

Solution: It is essential to segregate the custody of the asset from the ability to post to accounting. The best way to accomplish this goal is to utilize a full-time cashier who has no access to accounting. Additionally, there is no reason for the physical deposit to be brought to the accounting office. The cashier should write up the deposit slip, reconcile it to the supporting paperwork at the end of each day, and lock it in a safe to be taken to the bank by a designated runner the following morning. A copy of the deposit slip along with the supporting documentation should be given to the cash sales clerk to reconcile and post to the general ledger.

Dealership Fraud — It Comes in All Shapes and Sizes

Guess What — Chances Are, You Are Going to Pay More Medicare Tax in 2013

• For tax years beginning after December 31, 2012, high-income taxpayers will face two new taxes - a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here is an overview of the two new taxes.

• Certain “unearned income” of individuals, trusts and estates is subject to a surtax of 3.8%. This tax will be in addition to the income tax that applies to the same income.

• The surtax, also called the “unearned income Medicare contribution tax,” is 3.8% of the lesser of your (1) net investment income (NII) or (2) the excess of your adjusted gross income over the applicable threshold ($250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married filing separately). “Adjusted gross income” (AGI) is on the bottom line of page 1 of your Form 1040. (If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.) Taxpayers will only owe the surtax if they have NII and have AGI above the threshold amount.

• “Net Investment income” is investment income less deductions allocable to such income.

• “Investment income” is gross income from interest, dividends, annuities, royalties, rents, and net gains from investment property sales.

• Income from an active trade or business isn’t included in net investment income, nor is wage income.

• The 3.8% surtax applies to a trade or business only if it is a passive activity of the taxpayer or a trade or business of trading in financial instruments or commodities.

• “Investment income” doesn’t include (1) amounts subject to self-employment tax, (2) distributions from qualified employer plans or IRA’s, or (3) tax-exempt income (i.e., earned on state or local obligations).

• The surtax doesn’t apply to trades or businesses

conducted by a sole proprietor, a partnership or an S corporation. However, income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the surtax.

• The surtax doesn’t apply to any gain excluded from income tax on the sale of your principal residence. However, any gain that exceeds the limit on the exclusion will be subject to the surtax.

• The surtax must be included in the calculation of estimated tax payments.

• The 0.9% additional Medicare tax on wage income is in addition to the 1.45% Medicare tax that wage earners already pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

• Once the employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages.

• The 0.9% additional Medicare tax also applies to self-employment income in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others. The 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds will be reduced by the taxpayer’s wage income.

The 3.8% Surtax on Unearned Income and the .09% additional Medicare tax on Wage and Self-Employment Income for tax years beginning after December 31, 2012