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10 tips to spot warranty problems-before the auditors do

November 23, 2010
Warranty audits typically are as welcome as running out of gas in the middle of nowhere or getting a flat without a spare. Worse, they often sneak up without warning and leave a six-figure chargeback in their wake. But the pain of a warranty audit, like other dreaded events, can be prevented or minimized with preparation. "The best control (a dealership) can have over warranties is a financial person who makes sure the i's are dotted and the t's are crossed," said Walt Ginther, who specializes in warranty administration for dealerships. Ginther, a CPA who spent 13 years as a Ford auditor, figures that all the average-size dealership has to do is "get sloppy," and it could easily have a $100,000 audit. Getting sloppy is not uncommon. "In many dealerships warranty is like a stepchild that the financial people don't want to deal with," Ginther said. "Most financial people just make sure the warranties get paid." For those who don't pay much attention to warranty claims, or who are unsure how to dot those i's and cross those t's, Ginther offers some advice on how to handle 10 "red flags"-before the auditors come knocking. Add-on repairs. Make sure add-on repairs-repairs for problems detected that don't match the customer's complaint- are authorized by service management in writing. Ginther recently was involved in an $80,000 audit which resulted largely from inadequate addon documentation. While the dealership's day management had authorized add-on repairs, its night management had failed to do so. Comeback repairs. Have service providers ask each customer three key questions: Did you have this problem before? Was it OK when you left the shop? When did the problem reoccur? Record the answers on the repair order and get the customer to initial it. If the customer says the vehicle worked when he left the shop, but the problem is back, it should be handled like a new problem and not a comeback. Technician's time recording. Make sure technicians remember to consistently punch on and off individual repair orders. If they fail to do so, especially when taking breaks, they'll frequently exceed labor time standards- and that catches the eyes of auditors. Payroll records. Make sure technicians clock in each day. The payroll time clock has to match each technician's repair orders, or the result is discrepancies. Goodwill. Remember to document the reasons why goodwill adjustments were offered beyond the warranty period, and make sure the reasons are acceptable. Extending goodwill is OK for repeat customers or customers who may be in the market for a new vehicle. On the other hand, don't appear to offer an "extended secret warranty" to all customers who have recently exceeded their warranty mileage, said Ginther. Parts availability. Warranty repairs require the use of factory parts purchased from the factory or from an aftermarket source. Make sure inventory records clearly state beginning physical inventory plus purchases from all sources (which can be checked against the accounts payable records). Ginther advises to indicate on the accounting record of a repair order if a part was purchased elsewhere. Fluids. Dealer who don't use the  factory's fluids (e.g. engine oil, transmission fluid, power steering fluid, coolants) can invalidate the repair and void the warranty. And the auditor can charge back the fluid or the entire repair. Purchase enough factory fluids for warranty repairs from either the factory or a wholesale distributor-and keep the documentation to prove this. Technical assistance. Whenever technical assistance is received from the manufacturer, it is critical for service people to document who they spoke to, when they spoke to them, specific recommendations provided, and the case number. The technical assistance worksheet, if available, should be attached to the work order. Return of scrap parts. Any part that came off a repaired vehicle should stay in the parts department until claim payment is made. A stamp on the repair order should indicate the part number and the date received. The parts department employee who received the part should initial the repair order. Record retention. Make available for auditors any required repair order records (up to 12 months beyond warranty claim payment for Ford; 24 months for GM). Stash older records out of sight in a separate storage area, away from auditors. To guage how warranty expenses stack up, Ginther says to review a manufacturer's monthly expense reporting forms, which compare dealers' warranty expenses. That helps a dealer to identify areas where it is difficult to maintain costs and to work on them prior to the pressure of an audit. Remember, audit exposure is usually influenced by the dollar amount claimedin warranty repairs. Dealers, Ginther said, who dot their i's and cross their t's come out of  the audit owing nothing. That happened a few years ago to one of his Midwest clients-and the auditor didn't like the clean slate he found. The dealer apparently tried to charge back a diesel engine repair merely to have something to report. Ginther helped to appeal this charge, and the manufacturer ended up reversing it. Most dealers learn from their costly warranty mistakes. But, Ginther said: "Some learn fast and become gooddocumented dealerships. Others just go on their merry way and don't do anything about it."