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Hidden Secrets in your Work in Process

By Marilou Vroman, CPA, CFE

As we approach the year end it’s a perfect time to clean up the books and make final adjustments to the dealership P&L and Balance Sheet.  While most of the focus traditionally is what is on the books, extra care should be taken to uncover what is not yet on the books and should be.

As part of our internal audits we typically will review reports of service work in process.  Why are these reports so important?  In a perfect world, these reports contain transactions from the service department or body shop which are not yet complete.  In other words, there is additional labor to be performed or parts to be installed to complete the repair.  Technicians are often paid for their time as accumulated on the repair order and the associated labor and parts sales, gross, and receivable are ultimately recorded when the repair order is closed.  This is the perfect world.

We often find the work in process is an area where hidden losses or receivables exist.  For example, we typically find open repair orders pending payment from an insurance company.  The work is complete, the car is gone, yet there is no record of the transaction on the books because it is still “pending” in work in process.  This is a dangerous place since no one would know to look for payment except the service writer, booker or body shop estimator responsible for the repair order.  An open repair order can easily be voided or altered without detection.  In addition, some open repair orders contain known losses such as charges to policy expense or variable gross profit for goodwill or items promised to customers at the time of sale for which no liability has been recorded.  At times, we’ve seen these charges intentionally deferred in work in process to avoid impact to compensation or departmental performance.

Best practice is for the Controller and Service Manager to review open repair orders regularly, especially those which are aged.  In an addition, an employee outside of fixed operations should conduct periodic and random physical inventories of vehicles in the shop compared to the open RO list.  There should be a vehicle for every repair order and if a vehicle is missing, there should be a very good explanation from management why the repair order is not yet closed.

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