Preparing for a Factory Audit

I was looking at a dealer's plans for a new building a few years ago. The blueprints showed a small room about the size of a broom closet with a simple light fixture and no heat or air conditioning vents. I asked the dealer what the room was for. That's where we're going to stick the manufacturer's auditors, he said. He wasn't joking. Manufacturer dealership audits both for sales incentives and warranty

I was looking at a dealer's plans for a new building a few years ago. The blueprints showed a small room about the size of a broom closet with a simple light fixture and no heat or air conditioning vents.

I asked the dealer what the room was for. “That's where we're going to stick the manufacturer's auditors,” he said. He wasn't joking.

Manufacturer dealership audits — both for sales incentives and warranty payments — appear to be increasing.

The best preparation for an audit is getting it right before you claim the compensation the factory owes you. That means knowing the factory's programs and procedures, correctly documenting the dealer's right to compensation, and regularly spot checking compliance.

When audit day inevitably arrives, making the auditor as uncomfortable as possible is not wise. There are a number of things you should be doing to manage the dealership's opportunity for a successful outcome, however.

  • Assign a contact person who will be available to the auditor. There should be one person with authority to speak for the dealership to minimize the possibility of conflicting stories by different store personnel.
  • Prepare to argue your position during the audit. Before the auditor arrives, the manufacturer generally provides information about the nature of the audit. Understand the programs being audited and the dealership's performance. Be ready to defend yourself.
  • Meet with dealership staff before the audit. Auditors like to interview or just talk to dealership staff to pick up conflicting information. This information, often false or misleading, will only prolong the audit. Tell the staff that the auditor will be on the premises. Make sure they know who the dealership contact person is. Tell them to audit questions to that person.
  • Do housekeeping. Like a dirty seatback tray can make an air traveler uncomfortable about engine maintenance, a messy dealership can make an auditor question how the dealership does business. Used parts and non-OEM boxes lying around the service department can cause concern about the validity of warranty claims. A mess of paperwork at the sales tower can make an auditor wonder if staffers take as little time to understand the sales incentive programs as they do to organize their work papers. Clean up before the auditor arrives.
  • Know your rights under your state law. Many states have statutes that regulate the look-back periods for both sales and service audits. Sometimes those statutes even establish the standard a manufacturer must meet to impose a chargeback. Understand your rights and use them.
  • Be especially careful if the word “fraud” comes up. Most state laws expand the look-back period for fraud. For that reason, manufacturers have been throwing around that word with increasing frequency. If an auditor demands access to records beyond your state look-back period because of fraud suspicions, contact your legal counsel. Make sure that the factory it is not just on a fishing expedition.
  • Attend the closing meeting and listen carefully. When the audit is complete, you will generally have a closing meeting. Listen carefully to the manufacturer's position and ask questions. An opportunity may remain for minor adjustments, but by the closing meeting the manufacturer's position is generally set. Learn as much as you can during the meeting. Such information may help if there's an appeal.
  • Understand your appeal rights. Most manufacturers provide an internal appeal process. Use it, even though the factory personnel who decide the appeal are likely to be the same folks who were responsible for the audit results. Most state statutes provide for an appeal to the state regulatory agency or to a court. Don't be shy about an appeal to the state if the appeal to the manufacturer is unsuccessful.

Attorney Michael Charapp represents vehicle dealers. He's at (703) 564-0220 and [email protected]

TAGS: Dealers Retail
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