Protecting Your Business From Fraud

with Hunt Demarest, CPA/ABV with Paar, Melis and Associates

MWACA: What departments are most vulnerable to fraud?

Demarest: The two biggest areas I see fraud in is the parts department and anywhere dealing with deposits.

MWACA: What red flags should shops look out for?

Demarest: You spot fraud in numbers or inconsistencies for which you cannot answer. One of the telltale signs of fraud, embezzlement, or mismanagement on the part side of things would be recog- nizing lower profit margins on your parts than you think. Your shop management software says that you're making 50% parts margin. However, in QuickBooks, you're making a 30% margin. Generally, the discrepancy is that you are paying more to your parts vendors than you think, which could indicate a theft issue or mismanagement.

MWACA: What best practices should a shop owner implement to prevent fraud?

Demarest: Fraud, if done correctly, is virtually impossible to spot. Generally, it's rarely caught. The only time that fraud is usually detected is when someone you know gets sloppy, someone else has to do their job, or they get greedy and go overboard. If someone is stealing $100 from you every week, it will probably be impossible to figure out. So processes and procedures need to be in place to catch it.

I do not want the same person receiving checkout customers, making deposits, and reconciling it because there are three different ways that they can play around with the numbers, and there's no one kind of checking over their shoulder to do it.

People commit fraud when they think that they can get away with it. If they don’t think their boss is looking at the numbers or will notice that something is going on, it's going to be a lot more likely for them to try something versus if you can put out that perception that, “Hey, I know where every single penny is.” And maybe even once in a while, you’ll ask guys questions so they say, “Wow, he knows what's going on here. How did he know that that water pump didn't make it onto an invoice that just happened two days ago?” Perception is reality; hopefully, we can stop this stuff before people even think about it happening.

MWACA: How can Paar, Melis and Associates help prevent fraud in shops?

Demarest: We're checking monthly that the numbers match up, but there's also a unique difference for us versus another accounting firm. Most accounting firms are not going to look at shops or shop management software. They don't under- stand that, and they don't realize why it'd be useful. We know that shop owners make a lot of decisions on their shop management software. We need to make sure that QuickBooks and their account- ing side is speaking the same language. And if we notice a discrepancy, to make sure that we can narrow it down to figure out where exactly something is going wrong. Whether it's an anomaly or some- thing a little bit more nefarious, we have to do more research and try and get to the bottom of what's going on there."

Hunt is accredited in Business Valuation and a licensed Certified Public Accountant that has been with Paar, Melis and Associates since 2006. He specializes in business taxes and valuations and does consulting work with repair shop clients nationwide. When he's not in the office, Hunt enjoys spending time with his family, golfing, and working on and racing his cars.