Dealers have become accustomed to having large amounts of franchisor money at stake in day to day operations.

Historically, warranty and recall repairs have generated substantial monthly claims. While the increasing quality of vehicles may have reduced warranty work, repairs because of recalls have mushroomed in recent years.

The other bases for claims are sales incentives that have dramatically increased during the last two decades. Factories intent on manipulating dealers have instituted increasingly complex incentive plans. Some stair step incentive qualifiers can make large amounts of money depend on the sale of just one vehicle to reach that stair step, with the resulting loss of large amounts if a vehicle is disqualified in an audit and the stair step is missed.

As the amounts of franchisor money have increased, so have audits on those payments. Many dealers believe that audits are a profit center for a franchisor, allowing it to recoup millions of dollars from dealers for which it should otherwise be responsible because of its warranties, recall responsibilities, and complex incentive programs.

Recognizing the importance to a dealer’s bottom line of keeping what it has earned from the factory, a dealer should be prepared to challenge an adverse result of a franchisor audit every step of the way.

The Audit Dilemma

Between the obvious headaches and disruption of having an auditor review service or deal files days on end, and the ultimate shock of the initial chargeback amount after the audit is finished, a dealer must decide what it will do when the audit is complete. A dealer has only two real options: 1) do nothing and let the chargeback take effect; or 2) challenge the audit. But is a challenge to the franchisor’s audit results smart?

Protect Your Business

Some dealers question the wisdom of challenging their franchisors’ audit decisions. “We must protect our relationship with our partners,” they say. But what is the franchisor doing to protect its relationship with its dealers? It is the one conducting the audits. It is the one trying to shift even more of its costs to dealers. A dealer should challenge an audit that overreaches, and audits often overreach for several reasons.

  • Ignoring state law. Most states have franchise laws that regulate warranty and incentive payments and the subsequent audits. Whether they wish to claim ignorance of the law, or they simply want to see whether a dealer will stand up for its rights, auditors often follow franchisor audit guidelines with little or no regard for state law.
  • Auditor mistakes happen. Sometimes auditors simply make mistakes. Audit results require detailed dealer reviews to turn up the mistakes.
  • Some auditors are out to make a name for themselves. Manufacturers deny they have a bounty system for audit recoveries, but even without a bounty, auditors want praise for a job well done. Some auditors, particularly if they are relatively new to the job, believe that large chargebacks can lead to pats on the back.
  • Franchisor policies change. Sometimes franchisors simply revise their policies on what they want to see emphasized in an audit with a resulting increase in chargebacks.

Deciding whether to challenge the audit also depends on whether there is a basis to challenge some or all of the chargebacks. Given the reasons for franchisor overreach in audits, there are usually bases on which to challenge. And given the money at stake, a challenge can be worthwhile.

Start at the Beginning

Some dealers wrongly believe that the audit challenge process starts when the audit is complete. The challenge process should start before the auditor even shows up.

  • Know the law. What protections does your state provide? How far back can an auditor go in reviewing factory payments? In Virginia, a factory can only go back six months, unless it has evidence of fraud which is strictly defined under the Virginia Code. What is the state standard the factory must meet to justify a chargeback?
  • Be at the opening meeting. You will receive a communication before the audit begins, but be at that meeting so you understand the scope of the audit, and be prepared to challenge any attempt at overreaching such as demanding materials on transactions beyond the permissible state time limit.
  • Make sure there is one contact person for the dealership. The only person who should be responding to inquiries for the dealer is someone who knows the law and the permissible scope of the audit.
  • Be polite, but firm. Challenge auditor positions during the audit. If the auditor permits the dealership to review the results before finalizing the report, particularly to provide additional back up, take the opportunity.
Use the Internal Appeal Process

Most factories provide an internal appeal process that a dealer must exhaust before pursuing any legal challenge in administrative or state courts. This process can lead to chargeback reductions that can end the need for pursuing legal challenges or at least cut back the issues for a legal challenge. Dealers faced with audits resulting in chargebacks should be prepared to participate in this internal process.

Any dealer pursuing a manufacturer’s internal appeal process should be prepared.

First, know the deadlines by which you must challenge or appeal audit results. At the conclusion of an audit, factories provide dealers with a written report of the results of the audit that usually includes a letter that spells out the time period by which a dealer must submit a request for an audit review or appeal. The time period for an internal appeal is also probably available in the factory’s warranty or incentive handling guidelines. Failing to timely challenge the audit results will mean that the dealer is accepting the results and foregoing its right to dispute the auditor’s findings.

Second, any dealer that challenges an audit must be prepared to substantiate the basis for that challenge on a vehicle by vehicle basis. Manufacturers have warranty incentive rules and policies, and the specific requirements of what a dealer must do to substantiate an audit challenge are usually spelled out in these rules and policies. For example, manufacturers may require certain documentation to support each claim. This can be a document intensive process and having knowledgeable dealership personnel involved in this process will be necessary. Under Virginia law, a factory cannot charge back a dealer where the dealer can show that the customer received the benefit of the work done or the incentive for which credit was given, even where the factory’s often detailed requirements are not fully met.

Finally, in Virginia a factory cannot process a chargeback to the dealership’s open account while the amount is being challenged in an internal factory appeal or an appeal to the Department of Motor Vehicles.

An internal appeal is a necessary precondition to a legal challenge, and it can often lead to chargeback reductions. A dealer should take the opportunity to use the process.

A Legal Challenge

Dealers still dissatisfied after exhausting the manufacturer’s internal appeal process should not hesitate to contact a knowledgeable attorney to explore their legal options.  There are negotiating opportunities throughout a legal challenge to affect the chargeback, and the Virginia Code gives you the right to mediate once you have filed for a hearing with the Department of Motor Vehicles. Even if you cannot come to a resolution, you can force the manufacturer to justify to an impartial decision maker its overreaching.