PARTS MANAGEMENT
The possibility of fraud goes with maintaining an inventory. A typical parts inventory contains many products that can easily be converted to cash. This makes the inventory a likely target for theft. You must acknowledge that fraud can easily exist in such an environment. Granted, in many cases, what appeared to be fraud turned out to be nothing more than circumstances arising from deficient internal
November 1, 2001
The possibility of fraud goes with maintaining an inventory. A typical parts inventory contains many products that can easily be converted to cash. This makes the inventory a likely target for theft. You must acknowledge that fraud can easily exist in such an environment.
Granted, in many cases, what appeared to be fraud turned out to be nothing more than circumstances arising from deficient internal controls or inefficient paper flow. Yet, fraud is a real threat. What can you do about it?
It's important to understand what contributes to its cause in the first place. Researchers point to three conditions that must exist for fraud to occur. They are: Situational pressures, opportunity, and rationalization. Combined, these make up what is known as the “fraud triangle. ” In short, a need (usually a financial one), together with the chance to commit and to hide a dishonest act (usually a theft), and with a self-rationalization that the act is justified.
Fraud Triangle
Situational pressures are generally social in nature. The person wants to improve his or her lifestyle, the person is in a cycle of “keeping up with the Joneses” or the person is in some situation that requires additional money. Whatever the conditions, these pressures can encourage an otherwise honest employee to consider fraud.
Opportunities are circumstances within the business allowing employees to commit the fraud and conceal it, assuming they won't get caught. For example, a delivery person in cahoots with someone in shipping and receiving could load extra parts during each delivery, sell them and split the money with his or her accomplice. Or a dishonest counterperson could ring up false returns, keeping the refund.
Rationalizing is justifying actions. In many cases the employee may feel underpaid or more deserving for his or her efforts. The attitude toward the dishonest act is: “I'm not stealing. I'm only getting what's owed me.”
The best way to deter fraud are programs that remove one or more elements of the fraud triangle. For example, situational pressures and rationalization may exist, but if you remove opportunity or decrease it significantly the likelihood of fraud will diminish.
To combat “actual fraud” or the possibility of non-fraud circumstances arising from inadequate internal control and paper flow problems, I recommend five actions that are identified by the acronym CLEAR: Check, Lock, Enforce, Access, and Record, which I introduced in my first book “BY THE NUMBERS: Principles of Automotive Parts Management.” Here are the basic measures to consider for each action:
Check
Perform random “bin checks” or a “perpetual inventory.”
Immediately investigate any unusual consumption or shortages.
Routinely check all outgoing freight, especially the parts department's delivery trucks. The quantity and type of parts being delivered must agree with all delivery tickets.
Check all incoming freight against bills of lading and packing slips, and any discrepancies are noted and corrections are made.
Review purchase orders regularly. They should be filled out completely and include a corresponding work order or parts ticket if applicable.
A physical inventory is performed at least once a year.
Check cash register balances regularly.
Require customer's full name, address and telephone number for refunds issued against returns. Randomly call customers to verify they are legitimate returns.
Always check references for new employees.
Periodically spot check trash cans and trash bins to make sure saleable items are not being removed in that manner.
Lock
All entrances and exits are securely locked after business hours.
The parts department has separate access from the rest of the dealership.
Depending on the inventory size and the number of employees, a locked security area with limited access might be considered for valuable items such as audio equipment.
All inventory items must be in an area that can be locked or secured after business hours. (As unbelievable as it sounds, some parts departments have unsecured inventories that extend into showrooms or service departments.)
Enforce
All parts department employees are aware of the security policy, and no exceptions to the policy are made, not even with the owner.
All parts department employees are required to administer the security policy.
Access
Access is limited to parts department employees only.
Signs are posted that clearly indicate “no admittance” areas.
Employees from other departments must have clear authorization to enter the parts department, and are accompanied by a parts employee.
Entrance locks are unique to the parts department.
Parts department keys are rigidly controlled.
Inventory file access is limited to authorized parts employees, and restricted computer passwords are changed regularly.
Parts counters act as adequate barriers with no open access.
The layout of bins provides for clear views of access doors including shipping and receiving areas.
Mirrors are installed to monitor hidden areas.
Record
No part leaves the inventory without being documented.
All records are accurately maintained.
Parts are charged against shop work orders by parts personnel only.
Counter tickets are sequentially numbered and accounted for daily.
Parts on loan to the service department are documented or, if using a computerized inventory control system with invoicing, a work order is put on “hold status” and removed only by a parts employee when the item is returned.
Parts used by the owner, if provided at no charge, are recorded on an invoice “at no charge.”
Any returns to the manufacturer or a supplier are documented and checked against any credits. A counter ticket can be generated for documentation. This will also relieve the inventory on hand quantity.
How do you know if fraud is being committed in your parts department? Unless you actually catch the person or unusual circumstances tip you off — you don't.
Fraud studies show that the main objective of an employee committing fraud is to keep the dishonesty going. This way the fraud can continue to provide easy money. Consequently, the frauds are often small scale and difficult to detect. As Herbert Hoover said, “A good many things go around in the dark besides Santa Claus.”
Gary Naples is a parts consultant to dealers and manufacturers. Based in Wilkes-Barre, PA, he's written two books on parts management. He's at 750-824-1528/[email protected].
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