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Body Shop Fraud – Is Your Operation At Risk?

August 22, 2012

In the current environment auto dealers are looking for ways to provide services to customers and diversify their income streams.  Many have built body shop departments to provide this income diversification.  However, in an automobile dealership, having a body shop department adds more complexity to an already complex operation.  Operating a body shop involves managing the flow of vehicles and parts of manufacturers other than the franchise.   And the volume of activities and various moving parts in the body shop department presents a unique challenge for management and certainly opens doors for possible fraudulent activities if proper controls are not implemented. 

One scheme discovered by an auto dealer was where a body shop employee was found misappropriating parts and moonlighting.  In the scheme, the employee would order extra parts under a legitimate repair order (RO) but were not on the insurance company estimate and then reduced the cost of other items on the RO (i.e. reduce labor costs, provide unauthorized discounts) to approximate the cost of the RO to the insurance estimate.  As an 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.  The employee would then alter the labor charges to allow the RO to still be the same as the estimate.  The employee went as far as putting Honda parts on a Mercedes vehicle RO.  The employee then walked away with the extra parts and conducted side business.  The drop in profit margin from reduced RO costs was not significant enough to draw management’s attention due to the high sales volume.  Furthermore, the insurance company did not perform independent reviews to 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.  In most instances the RO and the estimate would agree to the dollar. 

Additional analytical metrics could have identified this fraud.  Management should challenge the key performance indicators for each department and continually monitor them versus benchmarks.  When management looks back and reflects on the employee, there were indicators that were present which could put this employee at risk.  The person was on their cell phone constantly.  This would not be normal company business; something else must be going on.  The employee was always on the internet.  The employee had marital issues and owed child support.  When they look back at all these indicators they believe it should have clued them into looking closer at this part of the operation. 

What parts of your business do you have an uneasy feeling about?   

Below are a few controls to consider strengthening 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.

System Controls

  • 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

Physical Observation

  • 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 RO
  • Observe any unusual activity such as increase in traffic or people in the body shop department

Vendor Control

  • Establish and maintain an authorized vendor list
  • Understand the vendors’ policy 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 his/her means
  • Consider external factors such as mounting credit card debt, alimony/child support payments, personal bankruptcy, etc.
  • Consider job rotation
  • Observe employees to see if they are constantly on their cell phones conducting personal business and try to understand more about their personal financial situation.  Desperate employees will do the wrong thing if given the opportunity.

Other Controls

  • Periodic review of ROs and compare them to the insurance quotes.  If Honda parts are on a Mercedes RO something could be wrong.  Does the part make sense compared to the fix?
  • Strong background checks including calling previous employers to get a better understanding of why they left those jobs. 
  • Margins reviewed monthly to ensure they are in line with expectations.  Meeting with department management to ensure they know executive management is monitoring their department.  Don’t allow departments to be out on their own.  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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