The Hidden Gems in Exception Reports.
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- Posted by AxioMobile
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By Marilou C. Vroman, CPA, CFE
A recent article surfaced regarding a dealership embezzlement where a service department employee was allegedly taking cash collected from service customers for their service work and subsequently pocketing the funds. The scheme was perpetrated by manipulating the repair orders after the customer had paid for the work. The repair order would initially be customer pay, and once the funds were collected, the repair order would be changed to a warranty repair. At times, the VIN and actual repairs performed would be altered to create what appears to be a valid warranty claim in an attempt to recover the stolen funds from the manufacturer. We often see repair orders voided or labor hours discounted in order to cover up the theft of cash. In this case however, the employee likely realized the technicians still need to be paid for the hours flagged as per the original repair order and would not detect a change in payment type from customer pay to warranty. So how could a dealer potentially detect this scheme?
Most DMS’ have reports available which indicate when transaction terms have been changed. Changes to repair orders such as labor rate, labor type, shop charges, taxes, shop supplies, operation codes, and so forth, can be revealed on these reports. Also, some technician payroll reports have audit features revealing where repair order terms have been changed. Exception reports are often run automatically as part of daily transaction processing but surprisingly we find these reports are often ignored by management. For those who have been in this business for many years, you may recall the countless pages of printed reports from the prior night’s job stack in the service department patiently waiting to be thrown away in the circular file.
One recommendation is to require a regular management review of these transaction exception reports and inquiry of responsible personnel. The exception report findings should be shared with the dealership Controller. Patterns of transaction alteration without valid explanation could indicate a cash theft scheme is present. At a minimum, the review of exceptions and regular inquiry of responsible personnel will act as a fraud deterrent by reminding the potential perpetrator that their actions, whether good or bad, are continuously being watched.