Many dealerships don’t like audits but they are a necessary part of the business
Many dealerships in Canada are going through their year end audit right now. It happens every year and, for some reason, has historically been assigned a negative connotation.
You often hear phrases like: “Oh no, our auditors are here” or “ I need this piece of information for our auditors” or “I’m concerned with the way you are doing things operationally—I know our auditors won’t like it.”
For some reason, many people on the operations side fear this time of year. This article is intended to remove that negative stigma.
Dealers can be subject to several different types of audits:
Internal audits occur when someone within the organization is assigned to “check on” the work of another employee or department. Are deals being built correctly? Are warranty ROs being closed and submitted properly? Are Business Managers engaging with customers in an ethical manner? Are we following OMVIC rules?
In larger corporations, there is a department set up to make sure things are being done the way they are intended. This could be accomplished in a dealer group by having controllers visit different stores to make sure the processes and procedures are the same everywhere.
Dealers generally hire external auditors to come in once per year to prepare the year-end financial statements (and likely the tax returns too). A corporation must hire an auditor to come in to verify that they are complying with Generally Accepted Accounting Principles and Tax Laws.
This is generally referred to as a financial statement audit. While there is a ton of preparation work your accounting department must do for this, it is generally done to add value to the organization. The idea is to have someone outside the organization confirm that what you are doing is as correct as possible.
External audits can also be performed by third party organizations such as the Canada Revenue Agency (for income tax, HST, payroll taxes), Workplace Safety and Insurance Board (WSIB), OMVIC or other provincial governing bodies, and OEM (warranty audits).
These organizations have a legal right to check your dealership’s work and policy to ensure compliance. While these can certainly be invasive and time consuming, it is very important work for the automotive industry as a whole —everyone including owners, employees, customers and investors are better off because these independent bodies act as a second set of eyes on your books.
The approach taken by all the above auditors are virtually the same. They use a combination of the following procedures to gain comfort on what you are doing:
Substantive Testing: Used to verify the information entered into your accounting system is correct. Common methods to test under this approach include performing various analytical calculations and tying transactions back to source data to ensure things are properly recorded.
Internal Control Testing: Used to determine whether the information system (ie. your DMS system) promotes correctness. This usually involves reviewing the source code of your system to ensure it yields correct decision-making information.
Combined Testing: an approach that leverages elements of both the above testing methods. Auditors usually take this approach when performing their work. This is especially true with larger groups as it allows the testing team to be efficient.
Indifferent of the testing approach or audit type, the goal of any audit is to provide reasonable assurance that information being presented by an organization is free of material misstatement.
In other words, is the financial position of the dealership presented accurately? As a byproduct of their work, auditors will also evaluate your risk management, control and governance process and provide you with high level recommendations to help your organization run smoothly for years to come.
As you can see, having an audit performed is not a bad thing. It actually helps your business identify issues and fix them before they become big problems. It adds value to your entire organization. You should use the recommendations they provide to set your group apart from your competitors.
Take advantage of it. Leverage it. Level up your dealer group.