Factory Audits – What Can You Do?

Every franchised dealer has gone through factory audits, whether for warranty payments or incentive payments.  Factory audits are here to stay.

Many dealers get the audit results, and (unless they are outrageous) they simply allow the franchisor to debit their open accounts.  But should they? 

Steps to be sure claims are correct can protect you. The audit process gives you additional opportunities for victories. Gaining a little at each challenge opportunity can pay off.

How should you best protect yourself from factory audit overreach?

Get it right the first time.

It may be trite, but the best protection against chargebacks is to get your claims right.

For sales incentives:

  • Know the programs – It is hard to correctly claim incentive payments when the sales staff 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 can keep its money?
  • 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.
  • Spot check claims – Are sales personnel following the requirements?

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 need not be followed to the letter, the dealer should try 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 about labor and parts been followed?  Were customer signature requirements followed? How about technician time stamp requirements?

Follow up – You must inspect what you expect:

  • Reconcile regularly – Reconcile the claim expectations to the factory payment results. If there are differences, investigate and follow up.  Make sure you are being paid correctly for your claims.

Be Involved in the Audit

What do you do when the auditor arrives? We have always recommended that you have one contact person interact with the auditor during the audit. However, the highest ranking executive in the dealership, whether it is the dealer or general manager, must be involved in the opening meeting and the closing meeting.

The opening meeting will allow you to understand what is at issue. You can do your research. You can review state law. You can consider factory requirements. Know your rights.

At the closing meeting, be prepared to use your knowledge to challenge the auditor vigorously. Has he gone beyond the time allowed by state law? Has he ignored state law that requires you be paid even if you don’t cross the Ts and dot the Is as long as you have evidence the work was completed for the customer? If the chargeback is based on manufacturer policies, challenge the auditor to show you the policies and justify their consistency with state law.

Sometimes, an auditor will go along with a request for a draft of the findings to comment. If you are fortunate enough to have an auditor do this, tear apart the auditor’s findings and make your presentation item by item.

If you engage the auditor vigorously, you will see you can move the auditor’s views on issues, and removal of some chargeback items will result.

Use the Internal Appeal Process

Most franchisors have an internal appeal process of the final audit findings. Review the processes in your service and parts manual. Know when you must file. Know what format is required for the challenge. Avail yourself of the opportunity to question each chargeback, line by line. You will find you will make further headway.

Use the state provided challenge procedure

If you are dissatisfied with the result of the factory appeal, you can file a challenge under state law.

Under Virginia franchise law, you are entitled to a hearing before the DMV to challenge a manufacturer’s audit results. Use the process. Franchisors are like everyone else involved in litigation. They will analyze the benefits versus the risk of loss, attorney’s fees, and other costs involved in fighting you.

You may find you can resolve the matter informally. If you file a DMV challenge, you have a right to use the Commonwealth sponsored mediation process. Or offer private mediation to see if you can further reduce the chargeback.

Often, as you get close to a hearing, there are discussions on what will lead to settlement without taking it through to hearing. The hearing process is expensive for both parties. Manufacturers often will not give credence to statutory requirements, for example that you have earned your payment even if you have not crossed the Ts and dotted the Is, until they are facing a decision by an administrative hearing officer or a judge who will give credence to a state statute applicable to the audit process.

There are opportunities all along the way from creation of a claim through chargeback challenges to make progress at each step.  The results will go to the dealership’s bottom line.