Preparing Your Buy Here – Pay Here Dealership for a Pain-Free Audit

Note: This article originally appeared in The Showroom.

If your Buy Here – Pay Here (BHPH) dealership has bank debt, there is a good chance your lender requires you to have a financial statement review or audit. With 2017 winding down, now is the time to evaluate your year-end closing checklist to help ensure a pain-free audit. Below are a few tips to make your upcoming audit a success.

Infrequent Entries

Many dealerships have certain accounts that are updated on an infrequent basis. For example, fixed-asset additions, disposals, and depreciation entries may only be booked on a quarterly or semi-monthly basis. Similarly, entries such as revising warranty accruals, adjusting deferred warranty revenue, and revising the allowance for credit losses may only be updated periodically. Getting a jump start on these accounts now will allow you to make smaller incremental tweaks rather than large adjustments at year end. Planning ahead will also help develop expectations for the bank and management, provide a solid foundation for the following year budget/projections, and assist in providing your auditor with accurate books for tax planning purposes.

Auditor’s Request List

Ask to receive your auditor’s request list early. If you do not understand a requested item, reach out to your auditor for clarification. Obtaining the request list as you close out the year will reduce duplication of work when it is time for the audit.

New Accounting Standards

Talk with your auditor to ensure you have a good handle on any applicable new accounting guidance that may affect the accounting or presentation of your financial statements at year end. Implementation of new guidance can sometimes be difficult, resulting in adjustments to your financial statements and delaying the timing of issuance. For example, most dealerships have already adopted the Financial Accounting Standard Board’s (FASB) accounting standard requiring management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year from the date the financial statements are available to be issued (ASU No. 2014-15, Presentation of Financial Statements – Going Concern). The BHPH industry has generally had a long and tough down cycle which has adversely affected most dealerships’ financial results. As a result of this accounting standard, many dealerships have had to prepare an analysis of their company and future ability to sustain operations, resulting in some financial statements issuances being delayed.

Reconciliations

Preparing reconciliations regularly seems straight forward but often goes unattended for too long without key management’s knowledge. Issues with account balances not reconciling to appropriate support is one of the most common issues that arise in an audit. Not resolving reconciliations in a timely manner will lead to large adjustments, timing delays in the issuance of an audit report, and/or significant additional costs outside the scope of an audit. Completing reconciliations on a daily, monthly, quarterly, and annual basis ensures any issues are resolved timely. Reconciliation and closing checklists should clearly identify the timeframe in which each process should occur, who performs the procedure, and who is responsible for the review of the reconciliation.

Bank Considerations

With most dealerships, the bank is typically driving the requirement for an audit. As a result, the goal of a successful audit should be minimal adjustments. It is never fun to revise previously reported financial results with the bank following the conclusion of an audit, especially if the revisions result in covenant compliance issues. Large adjustments can erode the bank’s confidence and can affect management’s abilities to make appropriate business decisions based on their understanding of the financial position of the dealership. Make sure you have a good understanding of your covenants and track your progress throughout the year, not just when the compliance certificate is due with the bank.

Performing all non-routine adjustments prior to year end will help alleviate any surprises. And, if you are going to be close on your covenants or think you will not pass, having a discussion with the bank in advance will go a long way. Oftentimes covenant violations can be addressed in advance and corrective measures, such as making capital contributions or requesting the bank to revise the covenant ratios temporarily, are possible solutions that are available before management trips a covenant.