Frauds & misappropriation of funds in Auto Dealership

Frauds & misappropriation of funds in Auto Dealership

The auto dealership is one business activity where the impact of fraud and misappropriation of funds are comparatively higher. Therefore, the success of this business to a large extent depends on containment of fraud and pilferage through proper and effective internal control measures. The complexity of auto dealership operations gives many opportunities to its employees to indulge in fraudulent activities resulting in drainage of substantial funds adversely affecting the profitability. Frauds occur in all areas of operation such as service, sale of spare parts and cars, body shop, finance & insurance, purchase & exchange of used cars and purchase of fixed assets the loss on account of fraud and malpractices could be anywhere between ₹ 75 lakh to ₹ 100 lakh in a year for a dealership having a turnover of ₹ 100 Cr to ₹ 150Cr unless effective and adequate internal control measures are in place. Professionals have a vital role to play in introducing and implementing proper & effective control measures at all levels of business activities


Some of the most common frauds prevalent in Auto dealerships are:

  • Underhand commission on the purchase of fixed assets
  • Underhand commission on the release of advertisement
  • Buying unnecessarily large amounts of aftermarket items lured by outright bribes or soft inducements
  • Manipulation & falsification of customers’ accounts for the release of payment to undeserving hands
  • Teeming & Lading of funds by units situated outside the principal place of business
  • Pilferage of diesel, spare parts, consumables etc
  • Not depositing collections in bank daily or depositing only a portion
  • Selling waste and scrap materials with no sales invoice and pocketing the proceeds
  • Fake events for the display of cars
  • The excessive claim of overtime
  • Unauthorised collection of booking advance by sales executives without reporting the same to the management or by issuing fabricated receipts.
  • Misuse of demo cars for personal use and excessive use of fuel
  • Claiming reimbursement of expenditure against fake invoices and bills
  • Unauthorised favours to customers and suppliers
  • Issuing dealership discounts not authorised by the dealer
  • Prompting customers not to purchase major genuine accessories from Auto dealer but to buy it from other accessory dealers with the intention of earning higher rate of commission from the latter
  • Undertaking repairs of cars without preparing a job order
  • Service staff releasing serviced vehicles without collecting payment
  • Issuing parts without preparing proper invoice and pocketing the money
  • Sale of used cars below the market value or purchase of used cars for excessive prices in return for kickbacks
  • Availing finance and insurance for vehicles from companies who offer personnel benefits to designated staff irrespective of whether the commission offered to dealer is competitive or not
  • Parts department staff substituting aftermarket parts for manufacturer-authorised parts


A well-designed fraud detection system can substantially bring down frauds and can enhance the likelihood of detecting frauds before they become catastrophic. The dealers should engage outside consultants who specialise in such matters to assist them in the design and execution of an effective internal control system.

Some of the control measures that may be introduced by the Auto dealers to minimise the occurrence of fraud are :

  • Adequate controls over cash including physical verification
  • Preparation and review of timely and periodical statements and confirming its veracity by external auditors
  • Budget Analysis on regular intervals to identify and correct adverse variances
  • Well-defined segregation of duties
  • Introduce Maker – Checker concept in all departments
  • Develop an approved vendor list and compare invoices with this list
  • Implement a purchase order approval system
  • Institute a policy of dual control over the used car department by availing the service of a knowledgeable person to verify the used car inventory car-by-car with the used car manager at least once a week.
  • Introduction and strict implementation of professionally prepared accounting and process manual
  • Regular & surprise count of Inventory
  • Being alert to changes in employee behavior and spending habit
  • Implementation of a whistle-blower mechanism
  • Limiting the access to stores and warehouses only to authorized persons


Author: CA Ajith Kumar FCA

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