Tips to stop fraud in your shop

An ounce of prevention is worth a pound of cure, as the old saying goes. But criminals are usually one step ahead, so it will take more than preventive measures to halt fraud in your business, according to an accountant who works with automotive repair shops.

The top recommendation from Hunt Demarest, senior accountant with Paar, Melis & Associates, is to always analyze your financial statements.

“Criminals are extremely, extremely clever. No one wants to get caught. But eventually, they do because they usually get too big,” he said at STX 2022, hosted by Worldpac and Advance Auto Parts in Orlando recently.

By that, he means an employee defrauding you won’t take $10,000 on their first try. They might take a couple hundred dollars at first, maybe even less, and build up that way.

“And then they say, ‘All right, nothing happened. All is fine. I’ll do a little bit more. [And then], I’ll do a little bit more, I’ll do a little bit more.’ And then it gets out of control,” Demarest explained. “And then what ends up happening is it sticks out like a sore thumb on the financial statements.”

Shops also need policies and procedures. But there needs to be a balance — too complicated and no one will follow the rules; too simple and the weaknesses can be exposed. For example, you may decide that your business will deposit cash at the bank only on Mondays, Tuesdays and Wednesdays. That may be because you don’t want variables on your financial statements. But if someone on staff prefers making these deposits on Fridays, then there could be issues.

“Now we have swings here. It’s going to be very hard to reconcile if we got the proper amount of cash because everyone’s doing it different days. We could have multiple days; we could have one,” Demarest said. “Again, we need to have repetition. We need to reduce the amount of variables in these financial statements.”

The separation of duties needs to be clear. It’s part of your checks and balances.

“The most common one here is … the person receiving the money should not be the same person depositing the money, and it should not be the same person reconciling that,” Demarest said. “Unless it’s you [the business owner], then you’re fine. But I’ve seen this a lot.”

Keep an eye on deleted invoices and discounts, he advised.

“Just having some oversight, having some eyes of yours in your shop to make sure that this is not going on, and making sure that the customers are not getting their information stolen,” Demarest said.