A fraud tale: Misdirection of parts

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One type of fraud a shop can fall victim to is a misdirection of part sales. A red flag for any shop would be a discrepancy between what the shop thinks it’s making on parts and what is actually being realized.

Hunt Demarest, a senior accountant who specializes in working with automotive repair shops with Paar, Melis & Associates, had a client suffer through this kind of scheme.

The client’s books were a mess. In the process of cleaning it up, parts margin data was compared to the shop management software. In Demarest’s eyes, so long as the numbers ended up in the same ballpark, he’d be fine with what he found.

There was indeed a gap. But the difference was more of a gulf. The SMS showed a parts margin of about 50 per cent; the accounting software came in at -15 per cent.

“You think that you’re selling parts for twice what you pay for them. In actuality, you’re buying more parts and you’re selling,” Demarest said during the session, Protecting Your Company, at this year’s Midwest Auto Care Alliance Vision Hi-Tech Training and Expo.

Of course, the shop owner’s initial reaction is that the accountant is wrong. A natural reaction, Demarest said, because it’s something the shop owner didn’t want to see — so there must be some kind of mistake on the accountant’s end.

“This is pretty cut and dry. Numbers do not lie. Look at this. Look at your parts cost of goods sold. Look at all the transactions,” Demarest said.

So they did some digging. They found credit card statements saying they had paid thousands of dollars recently to their jobber. But the SMS showed nothing bought from them in months.

But when Demarest mentioned the jobber’s name to the shop owner, he was able to put it together. The owner of the store was friends with a technician the shop owner fired a few months prior. The ex-tech opened his own shop, bought the parts from the jobber and charged it to his previous employer. He was able to do this because he knew how to exploit the system since the shop’s book were not kept up to date.

And that’s something that can easily happen in any shop. Think about it, Demarest said: A tech leaves and starts his own shop. He knows the parts guys well but doesn’t tell them he’s left. He orders parts from the store and tells the counterperson to put them on his old shop’s tab.

Of course, there would be clues, such as the tech driving to the jobber to pick up the parts. But the guy at the counter isn’t paid enough to really look into those questions. So the scheme lives on.

Demarest gave a few tips to pass on to jobbers, such as any orders from an unrecognized number should be ignored; certain people can only place orders; and no walk-in orders.

And, he pointed out, the shop owner wasn’t looking at his financial statements. The tech probably knew this and exploited that to his advantage.

“This has been going on for God knows how long and the only reason that was caught is because they actually started looking at the financial statements in the correct format,” Demarest said.