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Five Ways to Stay Clear of a Factory Audit

June 03, 2011

Dealerships across the country are striving to make 2011 a far more profitable year than 2010. Hard-working dealers are keeping their eyes on the market, on sales goals and on all of their business practices that impact the bottom line.

While the crunch is on, one area that's easy to overlook is the possibility of a factory audit. But remember, a factory audit costs a dealership time and money. With manufacturers also looking hard to boost profits, you'd be wise to do what you can to avoid an audit by your manufacturer.

  1. Fulfill expectations. Being tuned in to what the factory expects is the first and, perhaps, most critical step in steering clear of an audit. Make sure you and your staff understand the requirements and the potential exposure for failing to live up to these contractual obligations.

    Once everyone knows the rules, check that employees are documenting every transaction in a way that clearly shows they've been followed. If you're unsure of what may be required in a specific situation, contact your factory representative.

    Advise your staff that there can be no shortcuts when it comes to documentation. A simple purchase order with a final new vehicle price probably won't suffice. Tell employees to start with the MSRP and itemize every discount offered to the customer.
     
  2. Get your key people involved. No dealer can monitor every transaction for compliance, of course. That's why relying on sales and service managers is critical.

    These key players must stay up-to-date on factory requirements. And be sure they realize that failure to live up to their responsibilities could cost the dealership significant sums of money. In some cases, dealers have been forced to liquidate their businesses because of factory chargebacks.
     
  3. Review your records. On a regular basis, and as part of your general internal controls, review the paperwork a factory audit team would examine in a random or targeted audit. Look for discrepancies, errors, incomplete information, missing documentation and any other problem that could prompt further investigation. Then make sure the records are kept for the audit exposure period -- usually two years.

    If you uncover any problem, dig deeper. Don't assume you've stumbled over a single lapse in recordkeeping or a solitary misapplication of the rules. That could be the case, but you may have tripped over the tip of an iceberg.

    A pattern of abuse could be going on right under your nose by employees who have found that breaking the rules helps them work less or even commit fraud. In any case, the consequences could be costly for you.
     
  4. Stay on the beaten path. Although some audits are random, others are generated by dealerships whose operations vary too much from the regional norms. In this respect, the factories share a targeting technique with the IRS: They both look for the unusual. One of the most common triggers related to unusual activity is the apparent misuse of discount programs, such as offering discounts to ineligible buyers.
     
  5. Inspect your service department. Manufacturers don't look for just unusual sales activities; they also scrutinize service department activities. For example, multiple warranty replacements of the same parts on the same vehicle or incorrect mileage readings on vehicles receiving warranty work can trigger audits. So can labor hours that are out of line with factory allowances or a high number of certain service procedures or repairs.
 

Advisors | Auditors | Consultants | CPAs - Blum Shapiro is one of the premier public accounting firms in the northeast and a Top 100 CPA Firm in the U.S. Our professionals serve businesses, individuals and organizations in Boston (MA), Hartford (CT), Cranston (RI), Shelton (CT) ,Quincy (MA) and Newton (MA) with audit, tax and business consulting services. Our firm has developed practice areas in automotive, construction, education, government, healthcare, hospitality, manufacturing, nonprofit organizations and professional service firms. New Haven CT, Fairfield CT, Norwalk CT, Waterbury CT.