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Responding to Audit Notices

By Jason T. Allen

Responding to Audit Notices

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I wrote about manufacturer audit activity earlier this year, because there appeared to be an uptick in activity levels and there can be serious consequences depending on the findings of the audit.  That activity has continued, and I will address some of the same considerations when an audit notice arrives. That said, there are other potential audits (specifically state regulators) that are worth mentioning and being prepared for as well.

Manufacturer

The starting point for an audit is the manufacturer notice in advance of the audit. The notice will define the type of audit (such as financial, incentive, or warranty); the scope of the audit; and the date the audit will occur.  The audit notice should be inspected as it sets the stage for what is to follow, and in some instances, can be limited.  For example, if the audit notice includes a request for information beyond the statutory look-back period (in Florida, the look-back period is 12 months), then a response should be sent indicating that the information beyond the look-back period will not be made available. Similarly, if the audit is scheduled to occur without dealership input on available dates, then it is appropriate to respond with dates that are available and/or better for you/your employees. Finally, when the audit occurs, the auditor does not have a right to access any and all information, locations or employees. Instead, a discrete area should be provided and the auditor should be limited to that area.

State

In addition to manufacturer audits, state regulators typically have the right to inspect and/or audit certain dealership activities. One particularly relevant area of interest in Florida currently is title transfers and the timing of such. A state audit may be triggered by a number of different factors, but regardless, should be treated with respect and preparation. The failure to do so could have disastrous consequences to the dealer license and/or ability to operate.

Like a manufacturer audit, particular attention should be given to the type, scope and duration of the audit. For the most part, state regulators are attempting to insure compliance with various statutes/regulations moving forward and enforce the same when it is clear that there have been compliance issues in the past. However, in my experience, state regulators are typically not keen to levy unreasonable penalties to their licensees as they understand that it is an ongoing relationship.

Factors that can mitigate the scope of an audit and/or the ultimate outcome of an audit are the level of effort provided to comply with the audit, unique facts/circumstances surrounding the alleged discrepancies that are provided to the auditor, and finally, evidence of efforts to address any alleged issues moving forward. 

States (such as Florida) provide a mechanism to challenge audit findings/allegations of activity, but much of that can be avoided through attention to detail at the outset of the process and working cooperatively with the agency during the process.

To conclude, regardless of whether the audit is initiated by the manufacturer or a regulator, attention to the notice should be paramount as issues addressed early can often avoid larger issues after the audit/findings are concluded.

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