Internal audits, whether performed by internal employees or outsourced to an independent third party, offer owners the chance to see their dealership operations from a new perspective. In particular, when performed by a public accounting firm or another third-party specialist, they offer a chance to benchmark operational departments against other dealership groups, leveraging that firm’s experience in the industry and knowledge of best practices. This article discusses the potential benefits of performing a third-party internal audit and its unique function and capabilities compared to external audits while touching on common testing procedures and pain points.
Differences Between Internal & External Audit Goals
The purpose of an external audit is to obtain an opinion from an external auditor that the company’s financial statements present fairly, in all material respects, the financial position and results of operations and cash flows for the periods presented and in accordance with a reporting framework (such as accounting principles generally accepted in the United States of America). On the other hand, internal audits focus on operations and logical access, as well as compliance with regulators and other third parties (warranty providers, manufacturers, etc.), with more emphasis on fixed ops departments and other areas that may receive less attention than for example, the accounting department as part of an external audit.
Internal Audits (IAs) focus on the processes around oversight of functions and approval within each operational department and ensuring compliance with manufacturer requirements. Typically, internal auditors conduct interviews with department managers/directors to inquire about their process for reviewing/approving functions such as voided repair orders/parts tickets, credit memos, credit limit overrides, etc.
Beyond just identifying misstatements or income adjustments, internal auditors look to identify potential issues with store processes for identifying, investigating, and clearing balances that are not valid when performing schedule reviews. The primary goal is to identify opportunities to streamline processes for both tracking balance sheet accounts and setting up standard entries to reduce the degree of judgment required of office managers/controllers.
Most schedule analysis findings revolve around the overall process of controller review and tracking of improper balances. In addition, findings may include incorrectly accruing property taxes or other accruals, which can cause large spikes in income/expense from month to month.
Analyzing reconciliations ensures that essential functions are performed regularly and reviewed by appropriate levels of management and that reconciling items are investigated and properly supported. Reconciliations typically tested include the following: bank, floorplan, factory payable, parts to pad, and others that are generally expected to be performed on a monthly basis.
Findings generally include reconciliations not being performed regularly or at all. If performed, reconciliations may not have proper documentation or approval by the controller/CFO.
Transactions testing may be performed to assess compliance with certain regulators. Analysis of Form 8300 filings tests that reportable cash transactions over $10,000 have been filed correctly and timely, while deal file testing may be performed to assess that documentation required by law is retained for all deal jackets. Cash spiff logs may be inspected to test that they are properly tracked, approved, and included in wages for tax withholdings.
Segregation of Duties
This process looks at logical access to physical resources, GL software, check-writing/signing abilities, etc., to help mitigate improper or excessive access for certain employees.
Typically a pain point for dealerships, factory receivables (including co-op advertising, stairstep or incentive programs, and others) are typically tested as part of IA visits. Testing procedures may focus on programs the dealership participates in, looking at factory statements, or testing a sample of transactions to ensure that the dealership correctly records receivables without recurring write-offs or chargebacks from the manufacturers.
State and local tax returns may be examined to ensure that tax-exempt transactions are properly supported, as well as testing a sample of these transactions to be certain any government forms are retained and filed as necessary (state requirements may vary).
Typical Findings – “Pain Points”
While they may vary from store to store, audit results often revolve around general processes rather than specific findings. For example, if a credit card clearing account had a number of small debit balances aged over 90 days, internal auditors would focus their attention on the root cause (in this case, failure to collect payment information at time of sale). For first-time IA visits, findings generally revolve around schedule reviews, reconciliations procedures, separation of duties, and parts and service departments, as outlined below.
Parts findings typically relate to approval processes, tracking of parts tickets, and a general disconnect between parts and accounting. Typical findings include parts managers not reviewing open and voided parts tickets, parts tickets being held open after work is completed but awaiting payment, not retaining resale certificates for nontaxable customers, and not restricting access to voiding tickets/issuing credit memos.
Service findings typically relate to processes that put the dealership at risk for external audits, including the following:
- Warranty repair orders (ROs) not being submitted correctly and leading to chargebacks.
- Diagnostic time not being punched on warranty ROs, as certain manufacturers require.
- Warranty deviation reports not being reviewed, including metrics that may indicate the dealership is at higher risk for audit.
Other findings may relate to the dealership’s policy for tracking open ROs, or ROs being held open after work has been completed while awaiting payment.
IAs promote best practices based on industry knowledge and leverage other dealerships' experience and standard procedures. It may be time for your dealership to reevaluate certain long-term habits and consider implementing more effective processes to help streamline operations and increase productivity. Some examples include input on segregation of duties to ensure logical access, access to standard templates for completing reconciliations, and insight on tracking incentive programs that worked well for other dealers.
Some additional benefits include the following:
- Compliance with external regulators/manufacturers/etc. to avoid significant bills or chargebacks.
- Improving processes for Form 8300 submissions to reduce the risk of high-dollar penalties in future periods.
- Improving processes for submitting warranty ROs to increase warranty collections.
- Enhancing the process for submitting co-op advertising to recoup a greater amount of advertising spend.
- Reviewing rebates and incentive submission processes to avoid chargebacks or owing refunds to customers for rejected claims.
In addition, communication of findings from an external party provides objectivity and an additional voice to known issues; having a formal report to point to may increase the likelihood of issues being addressed.
Internal audits are a unique product offering that provides an overview of a dealer’s operational effectiveness. In addition, IAs can allow owners to assess their dealerships on a more holistic level by turning their attention to procedures and departments that do not often receive the same level of scrutiny via a financial statement audit. At FORVIS, our Dealerships team continues to serve a broad array of dealer groups and has been consistently recognized as a valuable asset in our client’s future growth portfolio.
Discover how we can help identify improvement opportunities and increase your dealership’s profitability by contacting a professional at FORVIS or filling out the Contact Us form below.