FRAUD IN THE PARTS DEPARTMENT Is Your Dealership Protected? BY LAURA EVERETT, CPA ALBIN, RANDALL & BENNETT, NHADA SILVER PARTNER Recently, our Auto Dealership Services Team shared an article that centered on a parts and service director charged with defrauding their auto dealership employer. This employee’s scheme involved ordering and receiving expensive manufacturer parts outside of the dealership’s dealer management system (DMS), selling the parts on Facebook at a discount, utilizing their personal PayPal account to accept customers’ payments, and using the dealership’s FedEx account to cover shipping costs. Meanwhile, the dealership was being billed and remitting payment to the manufacturer for these parts. Over less than two years, this employee’s fraudulent actions cost the dealership and its insurance company an estimated $600,000! Cases of fraud, such as the one described above, take a financial and emotional toll on a business but can be used as a learning opportunity for other business owners to determine if their current processes and controls could prevent and detect fraud. Take a moment to consider the following as it relates to your dealership: • Parts Pad to General Ledger (GL) Reconciliation: In the above example of fraud, the stolen parts were never included in the DMS inventory-on-hand, but payments were made to the manufacturer and would have been recorded in the GL parts inventory account. This would have created a growing variance between the parts pad and the GL. A parts pad to GL reconciliation should be prepared each month by the accounting team to determine that any variances between the parts pad and GL are known and expected. Any unknown and unexpected reconciling items should be researched fully. • Parts Inventory Cycle Counts and Year-End Physical Inventory Counts: These are key internal controls in the parts department. They also help with making sure your operation runs smoothly. Cycle counts are when a part is selected from the parts pad, traced to its location in the parts department, counted and compared to the number of units reported in the parts pad. The idea is that each part in the parts department is counted during the year, and adjustments are made as necessary. Additionally, a best practice is to engage a third party on an annual basis to perform a physical parts count. Like cycle counts, having a physical count completed would ensure the parts pad is accurate based on the inventory on hand. 14
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