Body shop fraud – Is your operation at risk?
In the current environment, many dealers have built body shop departments to provide services to customers and diversify their income streams. In an automobile dealership, having a body shop department adds complexity to an already complex operation. Operating a body shop involves managing the flow of parts and vehicles of manufacturers other than the franchise. The volume of activities in the body shop department presents a unique challenge for management and opens doors for possible fraudulent activities if proper controls are not implemented.
One scheme discovered by an auto dealer involved a body shop employee misappropriating parts and moonlighting. The employee ordered extra parts under a legitimate repair order (RO) which were not on the insurance company estimate, and then reduced the cost of other items on the RO (e.g., reduced labor costs, provided unauthorized discounts) to approximate the cost of the RO to the insurance estimate. For example, the employee would order a new bumper for the front of the car when the real fix was to the rear of the car and then alter the labor charges to allow the RO to equal the estimate. The employee walked away with the extra parts and conducted side business, either at the shop or offsite. The drop in profit margin from reduced RO costs was not significant enough to draw management’s attention due to the high sales volume. The insurance company did not notice the difference in the breakdown among labor, parts, and material/supplies between the RO and the insurance estimate. They were only focused on the total amount of the RO as compared to the original estimate, which in most instances agreed to the dollar.
Additional analytical metrics could have identified this fraud. Management needs to challenge the key performance indicators for each department and continually monitor them versus benchmarks. Other indicators of fraud were present. The person was on their cell phone constantly, which was not normal company business. The employee was always on the internet. The employee had marital issues and owed child support. These behaviors could have indicated the employee was a fraud risk.
Below are a few controls to consider strengthening for the body shop department:
Segregation of duties
- Parts purchases and sublet repairs should be reviewed and approved by the parts department or designated personnel outside the body shop department.
- Accounts payable should review authorization for purchase before making the payment and have receiving records to evidence the physical receipt of the good.
- Discounts over certain dollar thresholds should be authorized by the general manager. The general manager should review discount records on a periodic basis.
- Limit access to edit/remove parts from RO and to move parts from one RO to another.
- Limit access to edit labor rates/part costs.
- Limit access to enter discount over certain dollar threshold.
- Perform parts inventory observation on a unannounced basis in the parts department.
- Inspect parts orders and inventory for vehicles currently under repair in the body shop department; compare number of vehicles in the shop against active ROs.
- Observe any unusual activity such as increase in traffic or people in the body shop department.
- Establish and maintain an authorized vendor list.
- Understand the vendors’ policies on discounts such as volume discounts.
- Review vendor purchases periodically for abnormalities.
Identify pressure/opportunity/rationalization for employees to commit fraud
- Watch for employees living beyond their means.
- Consider external factors such as mounting credit card debt, alimony/child support payments, personal bankruptcy, etc.
- Consider job rotation.
- Observe employees' behavior to see if they are constantly on their cell phones conducting personal business.
- Conduct periodic review of ROs and compare with insurance quotes.
- Review margins monthly to ensure they are in line with expectations. Meet with department management to ensure they know executive management is monitoring their department. All departments need to be accountable.
- Consider having an outside party review the department, instill more fear into people, and add a level of deterrence.
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