Transformers: the need for the auto industry to administer effective scheme policing

auto dealer fraudThe auto industry relies heavily upon its dealership community to amplify reach within the market. More often than not, it is the car dealer who is the face of the brand for the customer. These dealerships comprise third parties which operate as ‘middlemen’ and cater to the retail consumer base, based on a dealership contract with automakers.

The dealer earns a certain amount of money as commission from the automaker, which is mainly on the basis of the number of cars sold. Given the nature of business, the propensity for auto dealer fraud can be high. Such issues tend to have a wide ambit of risk factors that can impact customers as well as automakers. The latter are, however at risk not only on the monetary but on the reputational front as well.

Why discount schemes are prevalent?

In this increasingly competitive scenario where achieving high sales numbers is tough, automakers would normally develop a variety of discount schemes in order to boost its car sales in the market. These schemes are designed by automakers to pass on the benefits to the retail customer, through the use of dealers; thus improving sales. Such schemes may be structured either on the dealership’s discretion or based on a select set of criteria determined by automakers. Here are a few examples of what typical auto discount schemes could comprise:Infographic 1

The purpose of providing these discounts is to drive sales, build a positive brand perception as well as connect with the target customer base.  While the intent may be positive, these schemes could be misused and lead to fairly significant repercussions. Automakers therefore, need to keep a close eye on the workings of the discount model to check that such schemes are honoured with proper documentation and approvals. If not, it could have a negative impact on the brand.

The discount fiasco

‘When the cat is away, the mice are at play’; this common metaphor would be an apt reference here. As automakers rolls out such discount schemes, dealers are usually privy to the way the approval functioning is scheduled. While much emphasis is laid on devising appropriate schemes to reach the market, there may be gaps in the monitoring mechanism to track the program effectively post its roll out. Like other systems, these discount schemes too are prone to loopholes, which could be exploited by devious characters. In cases, wherein such issues have been investigated, it was seen that certain dealers increase sales by manipulating requirements. These could include misleading and falsifying customer documents to gain access to the scheme, or in other cases, misuse the approval process.

Some key issues are listed below:Infographic 2

Other issues on the dealer front, which could be faced by auto companies are:Infographic_3

In order to augment its presence in the market, automakers present their dealers with large targets. Furthermore, the automaker puts tremendous pressure on its sales team, who in turn put pressure on dealers to achieve these targets. This results in dealers resorting to unethical practises to achieve these numbers.

The inside threat

In some scenarios, it has also been observed that the accounts team within the auto company may also be involved. Their involvement takes place if they may post fake entries in the books and turn a blind eye to noncompliance with regard to the stipulated scheme requirements. In many cases, as these teams are part of the company’s sales function, they justify these actions as helping the sales team overcome any hurdles to meet their targets. The dichotomy present here, is that they are enabled with capabilities to override any misrepresentation to quicken processing time, making this a flawed set-up to begin with.

Automakers responsibility

While automakers are normally large enterprises, working with multiple dealers and looking after different schemes at different locations, it is essential for the management and the board to stay abreast of the possibilities of fraud present through its various strategies. Having a holistic approach is the most essential factor for deterring such issues, therefore each facet of the following measures needs adequate emphasis and training for all the departments to effectively undertake responsibility. This includes:

  • Robust compliance policy and code of conduct with stringent enforcement action outlined for perpetrators
  • Strong ethical tone at the top
  • Efficient monitoring systems that are frequently checked and audited to rule out any instances of foul play
  • Thorough due-diligence processes to ensure the third-parties (including dealers) do not possess any nefarious history

These measures are important from an overall perspective and will inevitably induce change at a transactional level as well. Similarly, in the case of specific dealership discount schemes, automakers need to ensure that each part of its operational and administrative functions that are involved in processing such schemes (including dealers), are firstly aware of the stipulations of the scheme, and more so aware of the consequences of flouting norms. Furthermore, it is essential that the team approving dealer expenses is independent of any sales responsibilities, so that potential collusion within company personnel is minimized.

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