Manufacturer letters providing notice that a dealership has been selected as an eligible candidate for an incentive or warranty audit are critically important and should never be taken for granted. An audit may be the prelude for other plans a manufacturer may wish to accomplish, from the recovery of expenses to setting the stage for a notice of termination. Increasingly, manufacturers are using audits as a tool to recoup revenues (charge backs) and to discipline dealers with whom the manufacturer may have issues. The real issues that may underlie an audit may range from performance to demanded capital improvements which have not been agreed to by the dealer.
Most states have statutes that serve to limit the scope of the audit for one year or less, absent fraud. Further, dealers may have statutory protections that allow for demonstrating eligibility for payment either pursuant to factory policies and procedures OR by other reasonable means. Other statutes allow for correction of technical or administrative infractions. Your dealer lawyer can advise you on your legal rights in advance of the commencement of the audit.
II. How a Dealership Is Selected For An Audit
It is most often the case that a dealer is chosen for a warranty audit because a computer program at the manufacturer’s general accounting office selected the dealer based upon a number of varied statistical measurements. These identifiers vary by manufacturer and can be manipulated internally to achieve a desired result. Generally, the eligible audit candidate criteria measures the activity of dealers in a designated region, one against the other, or utilizes some statistical standard which measures multi (metropolitan) points and single points one against the other. The parameters of these measurements are limited only by a manufacturer’s imagination. Every manufacturer has exceptions to these standards which allows for audits when fraud is reported by a customer, employee, or manufacturer’s representative.
III. The Initial Contact with the Auditor
The auditor or specialist will usually attempt to meet with the dealer principal or general manager before the audit actually commences. If the manufacturer sends a letter confirming the date of the audit, as should be the manufacturer’s normal practice, respond to the letter in writing and ask for additional information about the audit. Points of interest should be the identity of the auditor, the period of time to be examined, the expected length of time the auditors will be on-site, and whether the audit will be a claim-by-claim or an extrapolation audit. Incentive and warranty audits are generally not random events and a manufacturer typically has a specific purpose and plan for the audit. The assigned auditor will have studied your incentive or warranty claims processes and relative audit statistics before ever setting foot on dealership property.
IV. Questions to Ask At the Initial Meeting
At the initial audit meeting, essential questions relating to how your dealership was selected for audit and the specific purpose of the audit should again be posed to the auditor. It is important that a dealer maintain detailed written notes of the initial interview in order to keep future recollections accurate. In the event of a controversy, accurate notes can be used to refresh recollection or as evidence if the notes qualify as business records. It should become a routine practice to make notes anytime you have a business discussion with a manufacturer’s representative. Thorough notes are particularly critical when the discussion involves a manufacturer’s complaint relating to a matter addressed in your franchise agreement.
V. Limiting Auditor Contact with Dealership Personnel
At the initial meeting the auditor will ask you to identify a person or persons from whom they can request assistance. The person you designate should be a person with managerial status who is familiar with your internal audit process and records. The person selected should neither offer nor withhold information from the auditor. The auditor may inspect the premises before the audit commences to observe the work environment, number of employees present, location of business records, etc.
VI. Review of Dealership Processes
In a warranty context, the auditor will review how information is transmitted from the customer to the service manager and finally to the dealership’s DMS. Improper dates and mileage are generally ripe areas upon which an auditor can focus. Such discrepancies, even though the product of innocent human error can be claimed to be false or fraudulent claims by a manufacturer. The lack of an authorized signature on a repair order will be claimed as a charge back even though the work was performed. Repair order signatures, proper dating, and accurate mileage recording, should be emphasized by the dealer and monitored on a daily basis even if done so simply by checking a representative sample. If a customer has not signed a repair order, at a minimum, have the order signed by the service manager.
In an incentive audit scenario, the auditor will be primarily concerned with the contents of the deal file, including customer signatures and required proof of customer eligibility for the incentives claimed. The absence of required documentation is often classified as fraud by the manufacturer. Fraud constitutes a stated basis for termination of the dealership’s franchise by the manufacturer.
VII. Audit Methodology
Once the full-blown audit commences, the auditor will either evaluate claims individually (claim-by-claim) or evaluate a series of claims and then extrapolate or multiply the results to achieve a charge back number based upon the extrapolation sample versus the entire number of transactions for the audit period. Claim-by-claim analysis is utilized when an auditor is attempting to identify false or fraudulent claims. Extrapolation audits are used when an auditor is seeking to generate a substantial charge back or even spot check for fraud. It should be noted that during an audit, some auditors may attempt to interview dealership employees. Employees who are not designated by the dealer/principal to assist the auditor should not engage in conversation with an auditor except in the presence of the designated employee or the dealer/principal and only after an interview is requested by the auditor.
VIII. The Exit Meeting
After the audit is completed, the auditor should meet with the dealer principal or general manager and explain the audit results. Generally, a final audit report will be prepared at a later date and transmitted to management for further review and comment. If a charge back or allegations of fraud are at issue, generally a meeting is held with the manufacturer’s upper level management and the dealer/principal to discuss the audit results. The dealer/principal should attend this meeting. If possible, the dealer should obtain a copy of the audit report in advance and review the claims in question under the audit. If additional documentation can be gathered then assemble such documents and take them to the audit meeting.
IX. Appeals Process
Most manufacturers have an internal appeals process through which audit results can be challenged. The extent of these appeal rights vary by manufacturer. Additionally, most states have enacted laws which grant varying degrees of protection to dealers against manufacturer audit practices. Every dealer should be familiar with his or her manufacturer’s audit process and state law. Prompt action can also result in the charge backs being stayed pending an appeal.
X. Contact Dealer Lawyer
It is imperative that you contact your dealer lawyer when the dealership is identified for an audit so that you will understand your legal rights before the audit commences.