Rob:
First, this is a big deal! I believe these unethical business practices will catch up with this owner. We all have checks and balances in which we occasionally monitor, but this case seems like it would be full time job for you if it continues!
I think I would confront the Service Mgr. and set a policy up for these instances of adjusting pricing or removing parts. We all have some adjustments to pricing now and then and if parts are taken off an RO, it needs accounted for and written off fairly. Have him communicate with you directly on exceptions. Educate him. Take small steps to TRAIN HIM IN and DONT tick him off. Probably dont restrict his access to the parts side (at least not yet) but I definitely would eventually!
Keeping a good close relationship with your Service Mgr. is important. At least in my case. Hes my biggest customer!
Id keep the owner out of it. Let the owner worry about the Sales Dept. problems..Ha Ha
Gully