A Story

A few years ago, an offsite owner of a dealership called us with a serious problem. In a short amount of time, she had been visited several times by a representative from her state’s tax commission informing her she would be receiving a sales tax audit because sales tax had not been remitted in over a year. She learned that over the same period, her accountant had not been paying for extended service contracts sold by her F&I department. Realizing there had been a serious failure in her dealership’s processes was obviously very troubling. More and more mistakes and errors began to make themselves known as she went through the company’s internal processes. The bigger problem was the fact that the dealership was spending the money left over in their bank account under the assumption that these obligations were being taken care of. This began the slow and painful demise of her business.

The dealership asked us to help them with their internal investigation. In the end, it was determined that the issues were not likely due to deliberate fraud. The unpaid sales tax and service contracts were serious mistakes brought on by a combination of lack of capacity and oversight.

When the subject of internal controls comes up, fraud is the most common issue up for discussion. However, mistakes and errors can be just as catastrophic to a business, and usually more likely than fraud. We could tell you story after story about the aftermath of genuine mistakes that seriously hurt or ended businesses.

In most of these scenarios, there are examples of these mistakes playing out without the owner being aware until a third party that was owed money showed up at their dealership. Scenarios like this highlight the need for “internal controls.”

Internal Controls

Some internal controls are designed to prevent mistakes and fraud, others are designed to detect mistakes and fraud. Internal controls are like the rules and systems that a company puts in place to make sure everything runs smoothly and safely. They are like the backbone of the organization, helping it stay strong and healthy financially. These controls include things like rules for handling money, accurate record keeping, and following laws. They exist to protect company assets, make sure its reporting is truthful, and make sure everyone follows the rules. With good internal controls, a company can lower the chances of things like theft or mistakes.

Effective internal controls encompass various aspects of the organization, including segregation of duties, documented policies and procedures, physical safeguards, regular reconciliations, and management oversight.

Segregation of Duties

Segregation of duties means spreading out tasks among different people in a company to make sure one person does not have too much power over something important. By dividing up important jobs like giving permission, record keeping, and handling money, we can lower the chances of mistakes, cheating, or misusing resources. For example, the person who says it is okay to spend money should not be the same person who handles cash or performs the bookkeeping. This concept helps keep everything accurate and honest in a company. Segregation of duties is like having a system of checks and balances to make sure everyone stays in check and on the right track.

Compensating Controls

Segregation of duties is tough for small businesses because they often have only a few people working and limited funds. In smaller companies, workers usually wear multiple hats, so it is difficult to split up tasks without slowing things down. Small business owners might struggle to figure out who should do what without giving everyone too much work or making things too complicated. Plus, hiring more people just to split up tasks adds additional costs. Even with these challenges, small businesses can still lower their risk by implementing compensating controls, cross-training employees, and leveraging technology to automate and streamline processes while maintaining effective segregation of duties to the extent possible.

If you run a smaller dealership that cannot maintain perfect segregation of duties and do not implement compensating controls, you expose yourself to the risk of embezzlement and potentially serious mistakes.

Leadership team’s preferences and approach to internal controls will vary, so I will avoid being overly prescriptive, but if you cannot maintain good segregation of duties in your dealership, I will offer some potential compensating controls. Please do not accept this list as comprehensive and perfectly relevant to your business. Hopefully, it is helpful to begin or continue the discussion around internal controls in your dealership and/or with a trusted accountant.

  • Daily deposit process always handled and signed off by two employees
  • No cash used for dealership expenses
  • Two signatures required on all checks
  • Physical security measures like, cameras and locks for secure areas
  • Only allow members of the parts department to remove parts in areas where parts are stored
  • Regular physical security assessments and audits
  • Employee background checks
  • Regular reviews of employee DMS security settings
  • Regular review of financial statements. Requirement to close company books each month and lock the period.
  • Random internal audits of things like:
  • Deposit process
  • Payroll posting
  • Bank reconciliations
  • Regular review of all manual journal entries (“overriding entries”) in your DMS. Custom reports are a great option for this in Lightspeed
  • Do not loan money or advance paychecks to employees


This article emphasizes the risk of costly mistakes. However, fraud is also a real risk, and it happens more often than one might guess. When my firm works with dealers, one of our main focuses is helping dealers keep their accounting up to date, a bare minimum of a 30-day close. We believe the simple action of organized, timely processing of data (finalizing deals, cashiering ROs and parts invoices, accounting, etc.) helps establish a culture of accountability and oversight within dealerships. If employees know that their DMS is up to date, reviewed, and closed on a regular basis, they will also recognize that fraud and mistakes will likely be noticed.


While fraud typically dominates discussions around internal controls, genuine mistakes can be equally detrimental, and more likely. Through the lens of internal controls, we recognize the crucial role they play in safeguarding company assets, ensuring accurate reporting, and maintaining regulatory compliance. The concept of segregation of duties, although challenging for small businesses, remains integral to effective internal controls, providing a system of checks and balances to reduce risks. Limited resources can be an obstacle for maintaining segregation of duties, in this case, small businesses can still reduce risks with compensating controls. By embracing a proactive approach to internal controls and remaining vigilant against potential vulnerabilities, businesses can fortify their defenses and safeguard their long-term success.

If you would like to consult with an accounting firm with years of real-world experience in the dealership space, The Accounting Guys welcome the conversation.


Adam Sipherd, CPA


Adam is a CPA with “Big Four” accounting experience in addition to serving high net-worth individuals and advisors in the wealth management space. Adam graduated from Brigham Young University with a master’s degree in accounting. Adam grew up in Utah and Idaho and lives in Orem with his wife and three kids. When it comes to entertainment, Adam’s tastes are eclectic, ranging from Taylor Swift to Tupac and The Bachelor/Bachelorette to Marcus Aurelius. Adam finds great satisfaction in his family, helping others achieve their goals, debits equaling credits, and tacos al pastor.

Lightspeed is the #1 Dealer Management Solution used within the Recreation industry for a good reason. We provide a completely integrated solution for dealers, OEMs and their customers. Our goal is to help you operate your business more efficiently and profitably so you can spend more time doing what you love.

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