October 2016

Startup BHPH dealer? Do it right the first time.

Posted on October 26, 2016 by Debra Barcuch

If you are not doing everything you can to be the BHPH dealer of choice, it may be time to ask the question: Why should the market allow your business to exist?

In this very consumer-driven market, cars are commodities. Start-up dealers should not operate as BHPH based on a few self-financed used cars. It is too expensive a proposition and too regulated without a clear business and community purpose.

Are you fulfilling an unmet need? Are you offering a wide selection? Do you accept trade-ins? Are you a fair dealer with a service focus? What is different about your dealership that will build a solid foundation for referrals?

Many new business owners begin with a business plan, usually to satisfy bank or partner requests. But a plan is also good for the owner to outline the exact research, steps and benchmarks to support success.

After writing the plan, expect to make changes along the way. You don’t have to follow things that aren’t working. You should also anticipate what-if scenarios and be ready with alternative steps.

Some key KPIs for start-up dealers can include:

Customer visits/calls per day to sell one car
Gross profit per car
Net income projections (gross minus expenses per month)
Cash on hand (2.5 times monthly expenses recommended for 2017)
Retained earnings (to put back into buying cars rather than bank financing)

Following a few key KPIs can help you measure whether the dealership is on track or if it will run out of money. KPIs can also help you monitor and identify unnecessary expenses or staffing issues.

At first, start-up dealers will be wearing all the hats. They will buy the cars, manage the books, sell the cars, communicate with customers and collect payments. When it’s time to hire some help, dealers usually hire office support staff to answer phones and handle repetitive processes. Then comes a salesperson or someone in collections. Before hiring, dealers should understand what they do best and where their time should best be spent for the benefit of the business. Hire employees who are strong in key areas to balance the dealer’s strengths and skills.

As you hire more people, you will need clear, repeatable processes for operating the business — even if you’re not there all the time.

What is the process for purchasing? Reconditioning?
What is the process for taking in trades, selling and delivering and servicing vehicles?
What is your process for accurately remitting sales tax?
What is your collections process?

A process manual should be part of every independent used car department, and used for training and a back-up plan if a key employee isn’t available to perform the tasks. Once created, it needs to be updated annually or as necessary to remain relevant.

Like any business, a buy here pay here dealership is created to serve a market demand and to make a profit for its owners. It can also have the side benefits of creating good jobs and helping other people keep jobs by having reliable transportation. The pressure to succeed is higher as competition increases, but the most successful dealers will put the right tools and safeguards in place to scale up and build a positive reputation.

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

Download the Whitepaper Here: How to Add More Structure and Scalability to your BHPH Dealership

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

How can an audit or review help business owners?

Posted on October 21, 2016 by Debra Barcuch

Let’s look at some of the issues that an audit or review can bring to light for business owners and how it helps owners make better business decisions.

Keep in mind that experienced external audit teams conduct multiple engagements each year. The best teams stay up to date on changes in audit or review standards through their profession and the industries they serve. They also get a sense of best practices from seeing the best and the not-so-great examples of financial management.

For example, the team may notice that the size or level of experience in the accounting department has not kept pace with the growth of the company. Timing may be right to hire a controller or CFO or to consolidate accounting departments in multiple locations to one central location. Perhaps key financial measures that are typical of the industry are not in place to properly forecast…or A/R is consistently dated 120 days or more.

These issues will be brought to light by an experienced external audit team… issues that internal management may not notice or want to change. We find sometimes that aversion to change or personality conflicts can inhibit improvements in an accounting department — issues that an independent audit can recognize and communicate to owners for objective, third-party validation.

Experienced auditors will take notes on these improvements and also provide insight to the owners and staff as they go through the audit process. Some of their notations may not be required in the official opinion to satisfy compliance, while others are specific to the company culture and goals.

Auditing and Independence

The guise of independence stops some auditors from consulting during an audit and sticking to a checklist. In reality, independence has four parts: (1) auditors can’t function in management and make improvements for the company; (2) they can’t perform the accounting work they are auditing; (3) they can’t advise for personal benefit only; and (4) they can’t act as an advocate for the client to a third-party. However, providing suggestions for improvements is acceptable as long as the audit team steps back and lets the business owners make decisions and implement them.

It’s not an easy role to bridge the gap between compliance and business advisory. It takes a skilled auditor to see the forest for the trees — that is, interpreting the processes and accounting into actionable business steps.

Because a team may be on site for one or two weeks depending on the scope of the engagement, the following are additional areas they may note for later discussions from a tax or advisory services perspective.

Improvements to internal controls, company reports and disclosures
Reviewing how transactions are processed
Accounting department structure and capabilities
Accounting software or hardware recommendations
Consulting on entity structures or planned entity structures
Consulting on expansion plans in other states
Methods to improve cash flow
Debt and financing structures
Industry thought leadership and research

Building rapport and a relationship with the business owner, staff and audit committee members can bring these needs to light. The audit team is on site to do the job efficiently, but that doesn’t mean they have to be impersonal.

Continue Reading: What can business owners expect for follow-up after an audit or review?

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

BHPH Budget and Expense Oversight

Posted on October 20, 2016 by Debra Barcuch

The tried and true formula to increase profitability is to either increase revenue or reduce expenses. Is your dealership as profitable as it could be? Is there room to improve your BHPH Budget? How do you know?

You could compare your dealership to other BHPH dealers and against industry benchmarks. If you discover that you are receiving less gross profit per car than the industry benchmarks, you may be leaving money on the table. It could be time to reassess your plan…or your plans.

BHPH dealers need several plans to oversee their budgets because it is a very cash intensive business. Your plans should include:

Six to 12 month revenue plan
Expense plan
Profit plan
Cash flow plan

In your cash flow, for example, if you are budgeting a $1,500 average in down payments but are really averaging $700, you will run out of money to buy more cars. If you are budgeting your expenses based on this cash flow, your budget will be off quickly.

In your revenue plan, are you projecting net new account growth or is it going to shrink? The more mature a portfolio gets, the harder it is to attain new growth (e.g. 20 paid off, 20 charged off, 40 loans a month = zero growth). Some dealers choose to chase aggressive sales without considering if the deal is a good one to put on the books. Charge-offs will eat up profitability more than any other expense, and it is usually a self-inflicted expense due to poor deal structures and underwriting.

Poor deal structures and underwriting sometimes stem from a lack of training for staff. Dealers should consider staffing and proper training as investments in gross profit rather than as expenses. Too few or untrained staff lead to shortcuts and mistakes. As you gain productivity from staff and consistency in deal documentation and communication, you can increase your gross profit per sale.

Plan your expenses in advance as you do your revenue projections. You should know your expense per car sold, including closing and underwriting costs, staffing, service and follow-up care and collections.

Continue Reading: Start-up dealer? Do it right the first time.

BHPH Dealer Collections Best Practices

Posted on October 14, 2016 by Debra Barcuch

Collections best practices are designed to increase the number of payments received on every contract — increasing cash flow and potentially increasing sales from referrals. A shut-off box on a car is no substitute for good collections practices. You are also discouraged from making field calls, as it can violate CFPB rules — not to mention be potentially dangerous. The key is to make your payment a top priority in the mind of the customer, specifically because customers trust and perceive that your dealership is willing to work with them to find a solution.

Nothing can really motivate a customer to pay for a car except a strong relationship. This approach is harder than billing and repossession. It takes a different mindset among your collections and service staff, but it can be efficient if you establish a positive rapport and understanding from the beginning of the transaction.

Your process and paperwork should be consistent and clean every time, no matter who is closing the deal. Emphasize that you expect payments on or before the agreed due dates. If you can, set up an electronic funds transfer (EFT) with customers around their payroll time. You can’t require it, but you can make it attractive by offering a discount. Outline the process of what will happen if they can’t pay on time. If the car malfunctions and if they need to re-figure the payment terms due to a change in circumstances, talk through those situations too.

Establish a clear process for communicating, which in some cases may be opt-in text messaging. You can now use SMS for automatic payment reminders, service reminders and late payment notices. In any and every case, keep the lines of communication open.

Follow up with a check-in call. Congratulate customers on their purchase and ask them if they have any questions. Make it clear that your team is there to help, so that their first contact with you is positive rather than a delinquency call. Provide clear contact information for customers to reach their “account rep.”

Results show that a strong closing process with full disclosure followed by a welcome check-in call reduces the need to chase down payments and also increases the number of payments made. This won’t happen on every transaction. There will still be cases of repossession, but dealers can reduce the chances. A full inventory of cars is not what you want.

Deal with service issues quickly.

One of the biggest reasons that customers stop making payments is that the car has a problem. Make it clear during the closing process that any issues with the car will be handled, whether through a limited warranty or service call. Depending on the issue and timing, work out how the customer will participate in paying for the service. Calculate the cost of the repair against the benefit of more monthly payments, and often the benefit is on the side of more monthly payments and a happy customer willing to refer your dealership to friends and family.

Keep in mind that your inventory is not your biggest asset; your portfolio is the golden egg. Accounts need to be worked every day by collections; don’t just wait for the phone to ring. A 30-day past due notice equals four to six missed payments. If you have 100 accounts, a good rule of thumb is to have four collections staff and one part-timer in the wings to pitch in when necessary.

Continue Reading: Budget and Expense Oversight

Keep Heated Political Debate in Check in the Workplace

Posted on October 11, 2016July 22, 2024 by Debra Barcuch

There’s nothing like a heated political debate that spins out of control to kill productivity and damage working relationships. The risk of a workplace harassment charge is also present, if a member of a protected class feels bullied. Generally, there are two approaches to keeping strong political opinions from become a problem at work: by setting a good example, and with an official company policy.

The former, which is often called the “tone at the top,” is straightforward enough. It involves making sure your senior executives keep their political preferences to themselves. If the CEO lets his or her political leanings be known (whether by talking about it or by wearing a political button supporting one candidate), it’ll be tough to keep employees with strong opinions from sounding off.

As for a company policy, you may already have language in your employee handbook that addresses this issue. It’s common, for example, to have a policy stating that employees are to treat each other with civility, which should include political discussions. Even so, as the elections draw closer, it doesn’t hurt to remind your workforce to curb political debate while at work.

What Others Do

A member survey by the Society for Human Resource Management (SHRM) earlier this year found that nearly three quarters of respondents actively discourage political activities in the workplace. Only one quarter, however, have committed their policies to writing.

Written policies typically prohibit an employee from:

Campaigning for a candidate or political party during working hours,
Relying on his or her position to coerce a colleague to make political contributions to a candidate or cause, and
Using employer resources (for example, your email server) to support a candidate or party.

What You Can Do

Some misconceptions surround employers’ ability to curb free speech. For example, the First Amendment doesn’t give employees the right to say anything anytime. Strictly speaking, the First Amendment prevents federal, state and local governments from taking actions interfering with the exercise of free speech in public settings. It generally doesn’t pertain to free speech in the workplace.

You’re well within your rights, for instance, to prohibit employees from distributing strictly political materials or plastering their work areas with political messages. You can also ban the wearing of political buttons under the same authority you use to establish dress code policies.

Depending on how strongly you feel about the hazards of employees’ wearing political buttons, you could focus your policy on customer-facing workers. Although this approach wouldn’t fully address the potential for conflict among non-customer-facing employees, it at least eliminates the risk of alienating the people who buy your products or services.

Political expression by employees outside the workplace is, of course, beyond the scope of employer authority. To maximize employee compliance, be sure to explain that the purpose of the policy isn’t to suppress employees’ political views, but to avoid the inadvertent infliction of emotional distress. It’s not self-evident to many people with strong views (on any topic) that their robust expression of opinions can be distressing to others.

Labor Union Politics

There are both legal and practical constraints on your ability to restrain political speech in the workplace. On the legal side, First Amendment notwithstanding, the National Labor Relations Act (NLRA) addresses the matter peripherally. Specifically, employers cannot ban employees from participating in “concerted activity,” such as speech pertaining to the “mutual aid and protection of employees” — in other words, labor union related actions.

What does labor union related actions refer to? It means employees can wear union-related clothing and buttons, which could be interpreted as a form of “political” expression. However, the NLRA does not sanction union membership solicitation during working hours. In any case, it’s important to draw a distinction between “political” and union-related communication.

Explain Procedures

When you unveil or re-introduce your policy, be sure to include an explanation of the procedure employees should follow if they feel others are violating the policy in order to trigger a company response.

If you have introduced a policy on political activity — or even if you haven’t — take seriously any employee complaints you receive about political harassment. As noted, if not investigated and properly addressed, complaints can evolve into legal charges.

Finally, you can incorporate a positive message into your worksite politicking policy: Encourage employees to take advantage of their opportunity to vote. Although you may already be required to do so under state law, you can let employees take time off from work to vote, preferably at the beginning or end of a shift if the polls are open.

A high proportion of employers participating in the SHRM poll (86%) do give employees that freedom. About half don’t pay employees for the time they take to vote; roughly one-third do.

After the Election

Emotional feelings about political matters don’t disappear once the election is over. While they may reach a crescendo on Nov. 8^th, you’ll probably need to maintain your policy on Nov. 9^th and every day thereafter. Don’t hesitate to remind your employees that, whatever the outcome, civility must rule the day in the workplace.

What are the Benefits of an Audit or Review of Financial Statements?

Posted on October 11, 2016July 23, 2024 by Debra Barcuch

An independent audit or review of a company’s financial statements by external auditors has been a keystone of confidence in the world’s financial markets since its introduction. However, when discussing the value of audited or reviewed financial statements with privately held, middle-market business owners and operators, their views might fall more along the lines of obligation to bank terms rather than any true benefit to the business. In fact, industry-focused audit teams can deliver many business insights. With the help of an audit team, business owners can improve controls and operational inefficiencies while gaining a sense of best practices within their industry. An annual audit or review can support proper regulatory reporting and compliance, implementation of accounting standards in a timely manner and improved company KPIs for forecasting.

It’s a rare experience when clients are truly happy to see their audit team.

They may like the people on the team and value their experience, but they may not enjoy the requests for data, the potential on-site distractions or the issues an audit team may discover.

As a CPA and career auditor in the Dallas area, I didn’t know if I could offer a different spin on this subject. Google tells us that an audit is defined as an official inspection — typically by an independent body — of an individual’s or organization’s accounts. A review is defined as a formal assessment or examination of something with the possibility or intention of instituting change if necessary. Based on those definitions, it started to take shape in my mind…official inspection? Formal assessment or examination? None of those sound all that amusing to get business owners to appreciate the experience.

OK, I am under no illusion to make the case that an audit or review will be amusing. However, I can provide some insight on how an audit or review is helpful beyond satisfying a bank’s (or other financial institution’s) credit requirements. The larger — and often unsung — benefits to a business owner are worth the effort.

What are the benefits of an audit or review of financial statements?

We’ve already mentioned the obligatory reasons that companies schedule audits or reviews. Depending on the requirements of a bank or financial institution, business owners will need to seek an independent and outside perspective on the company’s financial statements. The chosen audit services team, at a minimum, should be able to review documents, processes and procedures and then issue an educated opinion on the general health of the financial statements.

I say “at a minimum” because that is all the audit services team is really engaged to do. To get the job done, they can go down their checklist, issue an opinion and get out of the business owner’s way. For some business owners, that may be enough. For others, there can be many more benefits to the audit or review experience.

A focused audit planning meeting in the fourth quarter is really the best place to start. With an experienced audit team, this doesn’t have to take long. They should ask questions about what’s going on in the business now as well as the owner’s short- and long-term goals; it helps the auditors look for issues, develop a plan for the engagement and open the lines of communication between management and the audit team. Prior to the audit planning meeting with the client, the engagement team will meet to review the previous years’ audit to give the whole team proper context on the client, its operations, areas for improved efficiency and unique things about the client and the engagement.

Bringing years of experience from other business situations is another plus during this planning meeting. The common complaint of having to “educate” the audit team about your company or industry shouldn’t happen during the audit. An experienced team will already have that knowledge base and use their time for constructive feedback throughout the engagement.

Speaking of consulting, keep this in mind. As a business grows, the complexity of a finance department changes. General bookkeeping gives way to the need for internal accounting staff, then a controller, then possibly a CFO. Companies traditionally engaged a CPA firm to support historic accounting, tax and assurance services, but as the competitive stakes get higher, owners need more sophisticated advisory services to keep pace with change. Auditors should ask the question: Why are you doing it that way? If the answer is: “That’s how we’ve always done it,” then it’s an opportunity for real time insight during the audit engagement. An audit team should not be viewed only as an enforcement agency that stops business owners from breaking the rules.

When looking for an audit services team, owners and/or audit committees have to consider what they are really receiving from the engagement. Here are a few key characteristics to consider:

Does the audit team have industry-specific experience that can provide broader industry insights?
Is the audit team aware of industry and technical regulatory requirements that are specific to the company’s industry?
Has the audit team worked with similarly sized businesses to understand best practices for accounting requirements, company reports, controls and disclosures?
Has the audit team provided insight on accounting department staff capacity and levels of experience as they relate to the size of the company and its growth goals?
Will the audit team share operational best practices beyond providing baseline assurance on the financial statements?

This list may be considered above and beyond the confines of a typical audit or review — and owners may wonder if the price tag goes with it. In fact, an experienced audit services team can note many of these needs or issues within the timeline and hours of a competitively priced audit engagement. They know what to look for and can do it efficiently.

Continue Reading: How can an audit or review help business owners?

, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

Leverage Your Dealer Management Software

Posted on October 7, 2016 by Debra Barcuch

One of the common questions we hear from BHPH dealers, aside from how to get financing, is “am I doing the accounting correctly?” Although BHPH dealers have very robust dealer management software to track inventory, sales and customer accounts, they must consistently input the right data to leverage the software’s functionality.

Dealer Management Software

Common problems we see in dealer reports when working with clients include improper set-up of the chart of accounts, incorrect discounts recorded in the book of notes, and inaccurate deferred income (which impacts accurate sales tax remittances). If the dealer has an RFC, we will find that notes are improperly recorded when passed back and forth between the dealership and the RFC after sales and repossessions. Inaccuracies can lead to tax noncompliance and penalties in addition to inaccurate financial statements.

When setting up dealer management software, there are few shortcuts in the beginning. Ideally, staff is properly and frequently trained on better ways to use the system. There are also standard forms that can be used as templates and customized to simplify documentation and reporting, such as:

Sales applications
F&I forms
Disclosure forms

Sometimes the standard forms are just fine to start with, and as the dealership grows, staff may prefer customizing the reports for easier review and decision making.

Monthly or quarterly, the system should be reviewed for any recording errors or miscalculations, which will save the dealership time and money when it is time to remit/file taxes or report to financing partners.

Continue Reading: BHPH Dealer Collection Best Practices

Considering Another Dealership Franchise? Read These 6 Tips First.

Posted on October 5, 2016July 19, 2024 by Debra Barcuch

Consider this scenario: A small dealer isn’t looking to expand its business when an opportunity arises. A well-known-brand franchise in the area is up for sale. The franchise’s owner is losing money but the small dealer’s owners think they could turn the dealership around. New car sales are strong and financing is currently attractive. Should this motivated entrepreneur buy the business?

What Manufacturers Might Require

When considering a second franchise, you’ll want to take a close look at what the manufacturer will require. Is your existing manufacturer offering the second franchise? If so, it might allow you to stay in the same facility but require you to build a separate showroom or segregate your showroom area for the two brands.

Some dealerships are able to solve the dual franchise problem by hiring a receptionist to direct customers to separate showrooms as well as separate customer waiting and service areas.

If your manufacturer thinks you lack sufficient space, it may require you to open a second facility. It also might require you to dedicate one or more salespeople to the additional franchise and may try to make changes to your current sales and service agreements that you might not agree with.

If the second franchise represents a different manufacturer, the plot will thicken. The second manufacturer — or your existing factory — may have a long list of requirements that necessitate opening a new facility and running the new franchise separately.

Purchasing a second franchise is one of the biggest moves a dealer can make. Here are six steps to take in the decision-making process.

1. Choose the Right Franchise

Is the brand you’re eyeing likely to sell in your market? Just because you’ve always liked, say, Lincolns — and several of your customers have expressed interest — doesn’t mean they’ll sell well for you. Base your decision on solid data, not on instinct.

Consider whether the franchise is high-quality, is on the rise and matches up with your area’s demographics.

The manufacturer can provide sales projections and even assist in (and possibly pay for) market research. Don’t stop there: Seek hard data, including the failure rate, from objective third parties. Some financial analysts, for example, track auto manufacturer franchises, and your Dealer 20 Group may have additional information.

2. Determine if the Price is Right

The price of the franchise will probably be the deal maker or the deal breaker. As you evaluate the price, you’ll need to account for your short- and longer-term costs, including:

Altering or expanding your store, or building a new facility (see the right-hand box for some possible requirements from the manufacturer).
Adding to your sales force and back-end staff, and
Training staff on the new brand and manufacturer’s procedures.

One word of warning: A new franchise normally will operate under working capital constraints. Be sure that you won’t be strapped with too much debt service as a result of overspending.

Additionally, what is being purchased matters — that is, assets or stock. Asset-based purchases are more common for dealerships, but corporate stock purchases still exist. Future federal tax expense becomes a crucial consideration when determining how the deal is structured. An asset sale can favor the purchaser because costs can be recaptured more quickly through depreciation.

But the seller may prefer a stock sale because the tax paid on the gain often is levied at a lower rate. That means the seller may be willing to accept a lower price for a stock deal than for an asset-based transaction. For the buyer, a lower price might make up for missing out on the depreciation advantages of an asset sale — but the buyer also needs to be concerned about future unknown liabilities that could arise with a stock purchase.

Consult with your tax adviser about your situation so the best tax results are achieved.

3. Project Profitability Carefully

You should be able to find out the current franchise owner’s record of profits — or losses — fairly easily. But bring your financial adviser into the analysis to help identify any hidden losses or exaggerated profits. Annual losses, however, aren’t as much of a yardstick as you’d think, because the business is likely to be run very differently under your ownership.

What is extremely important when calculating profitability is the franchise’s purchase price and the value of its goodwill and potential sales volume. Is there enough opportunity for change in the business’s operations to achieve the profitability you’re projecting?

4. Assess the Impact on Your Franchise

If the second franchise is a standalone business, its profits and losses will be calculated separately from those of your first franchise. But if you’re putting both franchises together in the same corporate structure, you’ll need to assess whether the newcomer franchise will add value and profitability to your existing business.

Or will the second franchise rob your first franchise of sales? Be sure to estimate the retail impact of this “in-house” competitor carefully.

5. Weigh in on Staffing

You’ll likely have to hire additional staff for your new franchise operation. An exception: If you’re housing both franchises under one roof and can dedicate one or more salespeople from your current staff to the new endeavor. But you’ll still need to consider how the new line of business will stretch your management team, your back office and every other part of your operations.

6. Bring in an Expert

Your CPA can be a crucial peg in your decision to add a franchise. He or she can assist in:

Determining whether the franchise price is fair;
Performing due diligence to authenticate that what you’ll receive is what’s being represented; and
Conducting a sound business evaluation of all the factors mentioned above to determine whether the second franchise is a good idea or a bad one.

Last but not least, your CPA can assist in the submission of paperwork to the manufacturer for the approval of the sales and service agreement.

Opportunities and risks: Adding a second franchise is a way for capable entrepreneurs to take advantage of market opportunities and expand their businesses. But a second franchise carries just as much risk as any other investment, and you need a proven business strategy to make it all work.

Dependent Eligibility Audits Emerge as Cost Cutting Tool

Posted on October 3, 2016 by Debra Barcuch

Dependent Eligibility Audits Emerge as Cost Cutting Tool

As employers search for ways to contain employee benefit plan costs, many are undertaking dependent eligibility audits. The logic and the potential cost savings are compelling. Why pay for something — in this case, coverage for someone not entitled to it under the terms of a benefit plan — if you don’t have to?

Get Employees on Board With Audits

Many employers that choose to conduct dependent eligibility audits fail to communicate to employees the reasons behind the move — that is, the potential savings for the company and the staff.

Employers should use all available media, and stress that removing individuals who are not eligible for coverage will benefit not only the company, but all employees who are paying to have themselves,and family members covered by the plan. In some cases a successful audit might mean the difference between continued coverage and the decision to eliminate a health plan altogether.

Although the cost savings can be compelling, they’re not the only reason to conduct a dependent eligibility audit. ERISA mandates that benefit plans be maintained for the “exclusive benefit” of employees and employers as plan fiduciaries are required to operate plans accordingly. Arguably, covering ineligible individuals, which can create additional plan costs for all employees, runs afoul of these requirements.According to the results gleaned from one group of these audits, the percentage of ineligible dependents detected ranged between seven percent and 19 percent. With the cost of each employee dependent covered under a health plan averaging about $3,400 annually, the potential savings can be dramatic, even for a small business. The return on investment from dependent eligibility audits can be as high as 40 to 1. Savings should be significant, when you consider that each removed ineligible dependent represents dollars saved year after year.

The purpose of a dependent eligibility audit is to verify that individuals listed by employees as eligible for coverage — primarily spouses and dependent children — indeed meet the plan eligibility requirements. A simple employee certification or affidavit of dependent eligibility does not provide proof and, therefore, an audit requires employees to submit documents that substantiate eligibility.

An audit is a significant undertaking. Assume that you will need to:

Review health plan documents (and documents for any other plans for which the audit is being conducted) to determine the definitions for all possible eligible dependents.
Determine the documentation required for substantiating eligibility. For example, in the case of a spouse, this may be not only a marriage license or certificate, but also a recently filed joint income tax return to show that the marriage continues to the present day.
Establish a time line for informing employees about the audit and a deadline for submitting the required documentation. Develop communications materials accordingly.
Determine the process by which employees can submit their documentation and set up a mechanism to receive materials.
Review submitted documents to determine whether they meet the requirements for establishing eligibility. Establish a notification and grace period process for employees who fail to submit materials properly and/or on time. Inform employees of the audit results.
Since these audits generate a large amount of paper, arrange for secure storage and/or disposal of the materials employees have submitted.
Chances are the audit will generate questions from employees. That’s why a knowledgeable person or persons must be assigned to field employee inquiries.

Some companies choose to outsource dependent eligibility audits instead of conducting them in-house. Audit service providers cite the potential cost savings that can be achieved and the amount of work involved in a thorough, well-designed audit to argue that contracting for such services delivers a good return on investment. Ask your accountant for guidance.

What Other Design Factors Should You Consider?

The workload associated with a dependent eligibility audit can be substantial. In order to make the process more manageable, some companies audit only a particular dependent group, or a single company division or location at a time, instead of requiring all pertinent employees to submit documentation.

You also need to decide whether to conduct your audit retrospectively (and try to recover claims that shouldn’t have been paid) or on a forward-looking basis only. Many employers choose to precede the audit with an amnesty period during which employees can voluntarily remove dependents from the plan with no penalty.

Since most companies have traditionally run on an honor system when covering dependents — basically taking an employee’s word for it that those dependents enrolled for coverage indeed meet a definition of an eligible dependent — advance communications to alert employees of the audit, and the reasons for it, are critical to employee cooperation and, ultimately, the success of the audit.

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Month: October 2016

How can an audit or review help business owners?

Auditing and Independence

Continue Reading: What can business owners expect for follow-up after an audit or review?

Keep Heated Political Debate in Check in the Workplace

What Others Do

What You Can Do

Labor Union Politics

Explain Procedures

After the Election

What are the Benefits of an Audit or Review of Financial Statements?

It’s a rare experience when clients are truly happy to see their audit team.

What are the benefits of an audit or review of financial statements?

Continue Reading: How can an audit or review help business owners?

Considering Another Dealership Franchise? Read These 6 Tips First.

What Manufacturers Might Require

1. Choose the Right Franchise

2. Determine if the Price is Right

3. Project Profitability Carefully

4. Assess the Impact on Your Franchise

5. Weigh in on Staffing

6. Bring in an Expert

Dependent Eligibility Audits Emerge as Cost Cutting Tool

Get Employees on Board With Audits

What Other Design Factors Should You Consider?

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Insights & Resources

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Auditing and Independence

Continue Reading: What can business owners expect for follow-up after an audit or review?

Continue Reading: Start-up dealer? Do it right the first time.

Deal with service issues quickly.

Continue Reading: Budget and Expense Oversight

What Others Do

What You Can Do

Labor Union Politics

Explain Procedures

After the Election

It’s a rare experience when clients are truly happy to see their audit team.

What are the benefits of an audit or review of financial statements?

Continue Reading: How can an audit or review help business owners?

Dealer Management Software

Continue Reading: BHPH Dealer Collection Best Practices

What Manufacturers Might Require

1. Choose the Right Franchise

2. Determine if the Price is Right

3. Project Profitability Carefully

4. Assess the Impact on Your Franchise

5. Weigh in on Staffing

6. Bring in an Expert

Get Employees on Board With Audits

What Other Design Factors Should You Consider?

Local Firm, Top 25 Expertise

Unlock the potential of your business

Let’s Connect

Unlock the Potential
of Your Business

Let’s
Connect

Unlock the potential of
your business