Preparing for Your Next Audit
By W. Kirby Bissell and Jason Allen
Audits are a fact of life for motor vehicle dealers. Every OEM has the contractual ability to audit its dealers and it is easy to treat the audit as a routine or standard occurrence. While OEMs are contractually allowed to audit your dealership, you should not treat an audit as routine. Dealers should be prepared, take the audit seriously and ensure they know their rights before, during and after the audit to avoid being taken advantage of. The following provides an overview of considerations for your dealership both pre and post-audit, but to adequately prepare you should consult your dealer counsel as soon as practical after receiving notice of an impending audit.
OEMs are almost universally required to provide written notice to dealers before they are audited. You should read the audit notice letter closely and review your state franchise laws to ensure it meets the law’s notice requirements. Some things to take note of include what types of claims are being audited, what types of documentation is requested, the time period of claims being audited, and the timeline on when the audit will take place. Some state franchise laws limit the scope of claims that can be audited, whether by category of claims or time period. Others require that the notice contain the specific category of claims being audited. Other provisions in state franchise law may limit overly intrusive or burdensome requests for documentation. And, many state franchise laws require “reasonable” notice be provided regarding the audit. Evaluating these items before the audit occurs is an important first step to ensuring your dealership avoids potential audit pitfalls. If the OEM’s notice is deficient or there are other questionable facts surrounding the audit, you should consider writing to the OEM documenting your objections and get those resolved before the OEM employees arrive at your dealership for an audit.
Next comes the OEM’s visit to your dealership for the in-person portion of the audit. During this time, it is wise to assign a point of contact for auditors should they need additional documentation or have questions. The auditors should not be permitted to speak to employees other than the point of contact and employees should know to direct all inquiries to the point of contact. This controls the flow of information for the dealership and ensures there are no surprises. Also, auditors should only be given access to that which they specifically need based on the notice and the claims being audited. This may be stating the obvious, but do not allow OEM auditors free access to your records, DMS or other confidential dealership information. Finally, ensure that the auditors stick to the items covered by the notice and do not take liberty to deviate.
After the audit, know your dealership’s rights. There are typically statutory timelines under your state’s franchise laws that will govern the post-audit process, which restrict how and/or when an OEM can charge-back your dealership based on the results. Generally, the OEM must provide your dealership with the results of the audit within 30 days following its completion (or a similar timeframe). Then, 45 days following such notice (or another similar timeframe) your dealership will have the ability to challenge the audit findings and provide additional documentation disputing the same. Sometimes, there is another time period within which the OEM must provide you with a final decision. Moreover, many state franchise laws require OEMs meet certain burdens to charge-back warranty or incentive claims as a result of an audit (e.g., show that the claim meets statutorily-enumerated criteria, explain the basis to the dealer, allow the dealer to provide information objecting to the result, etc.). And, those same laws may limit the bases OEMs can use to charge-back (e.g., only for fraud or lack of documentation, etc.). After the OEM makes a final decision on all proposed charge-backs, your dealership also likely has the ability to protest those intended charge-backs before they are formalized. This is again usually a time-limited remedy that you need to be aware.
In closing, audits can be costly and time-consuming endeavors for your dealership. But, your dealership is not without recourse and rights under most state franchise laws. To avoid charge-backs totaling hundreds of thousands of dollars, know your rights ahead of time and be vigilant at every step in the process. Prepare by consulting with your knowledgeable dealer attorney long before you receive the final results of the audit.