An increase in audits throughout warranty claims processes means dealers should take a closer look at their processes.
October 22, 2024
By Barrie Charapp Beaty
Charapp & Weiss, LLP
bbeaty@cwattorneys.com
Dealers have noticed a trend with their manufacturers lately - an increase in audit activity. There are various reasons for the increase (i.e., change in warranty legislation, desire to cut into dealer profits), whatever the reason is, the manufacturers are on the prowl.
Many dealers wait for the audit results, and unless they are outrageous, they simply allow the franchisor to debit its open account. But should it work that way? There are multiple steps to preparing for and challenging an audit that give you opportunities to challenge the manufacturer’s overreach.
When dealers receive an audit notification, they gear up for the auditor. However, waiting until the audit notification arrives is already too late and damages the case to challenge. The audit process and results give you opportunities to address charge backs, and the results can be improved even if you gain a little at each challenge opportunity.
How should you best protect yourself from factory audit overreach? Get it right the first time. The best protection against chargebacks is to get your claim right.
For sales incentives
- Know the programs – It is hard to claim incentive payments when the dealer and the office staff really don’t know the programs. Get the programs and study them.
- Know the required qualifications and procedures. What qualifications must be met for the buyer to be entitled for the incentive? What procedures does the factory want in place to ensure the dealer’s rights?
- Train employees – It does no good to understand the programs at the management level unless the people implementing the programs know the rules including the qualifications and procedures. When a new program comes in, make sure that managers and salespeople are trained in the required rules and procedures.
- Document carefully – Document the company’s right to the payment submitted to the franchisor. The documentation should be contained in each deal file.
For warranty claims
- Know the Programs – Be sure service department personnel understand the claim requirements and processes. Even in states where the procedures of the manufacturer do not have to be followed to the letter, the dealer should make an effort to follow the manufacturer’s process.
- Document carefully – Document properly the problem, the diagnosis, the work to solve the problem, the time spent in doing so, and all other important aspects of the repair. Strong documentation is the most critical element to successfully weathering a warranty audit.
- Review claims – Regularly review warranty claims before submitting them. Is the problem diagnosis well stated? Is the work well documented? Have required procedures concerning labor and parts been followed?
- Experts may be needed to help - Dealers may have to hire an expert that specializes in audits to assist the dealership with warranty audits in training, claim procedure, identification of issues, etc. Experts in this field are quite helpful, especially for dealers that have been subject to numerous audits over a few years (with the same chargebacks still occurring).
Follow up: You must inspect what you expect:
- Internal Audit – Just as in any management system, one must inspect what one expects. Go behind those involved in the sales process. Regularly review the deal documentation to audit the money passed along to the customer, the eligibility of the deal for the incentive, and the documentation in the deal to justify the incentive.
- Reconcile regularly – Reconcile the incentive expectations to the incentive results. What incentive does the sales department expect on a deal? For what incentives does the transaction qualify? What factory payments were made? Reconciliation of the any incentives credited to the customer, the expected amount, the entitled amount, and the amount actually paid is a critical part of any incentive review process.
Challenge the Audit
Whether it’s the first audit in a while, or you are on an audit cycle, challenge every audit, even if the challenged chargeback amount is small. Upon receipt of the audit results, dealers should be reviewing those results and challenging them based on state law, internal records, and even mistakes of the auditor. Yes, the auditors can be sloppy and make mistakes in the audit.
Dealers often just want to point to a state law and have the manufacturer magically comply. It doesn’t work like that. You may have to enforce your state rights should the manufacturer be overreaching and charging you back for items that are not allowed under state law or failing to give you the warranty rate that your state law permits. Some franchisors have an internal process to challenge audits such as a Ford’s Policy Review Board, which dealers should be utilizing to challenge audits. Dealers need to use the tools afforded to them in challenging audits and it may require you to enforce your state rights.