Over the last 25+ years, I’ve seen some unbelievable things when it comes to dealership finances. One day, I will write a book but until then, I’ll just keep sharing ways to avoid these scary and often costly situations by implementing simple protocols when it comes to money and the people who handle it.
I spoke at the NIADA (The National Independent Automobile Dealers Association) convention in late June. As the association does every year, they were celebrating the new president-elect. This year, the association found itself at a crossroads, grappling with a tax controversy involving its president-elect’s dealership. My friend, Andy Friedlander wrote about it in Auto Remarketing.
Making sure timely tax payments are made is the dealership controller’s job.
The car business is one of the most regulated industries there is. You’ve got the DMV, EDD, IRS, and the FTC, just to name a few. So much knowledge and experience with each regulatory agency is required and having a controller who can support the dealership in this is crucial.
In the case of making timely tax payments, if you can’t make the payment, there are remedies. But knowing what the remedies are and how to work within the system only comes from years of experience.
The dealer-elect’s situation is not at all uncommon and while it has been mostly worked out, his story serves as a stark wake-up call for every dealer for many reasons. Here’s the background on what happened in this specific case but please know, this can happen to anyone.
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When cash is tight, certain decisions are made in haste.
The dealership was short on cash one quarter and the controller (who happened to be the co-owner and dealer’s spouse) chose to not pay the tax. According to reports, she “thought she would make it up next quarter.” Then, faced with the same cash crunch the following quarter, she didn’t pay it, nor did she pay the quarter after that, and so on. Understandably, she became scared and ashamed and as a result, kept it from the dealer as the problem kept snowballing.
To make matters worse, the dealership’s CPA didn’t catch the non-payment either because the taxes had been filed every quarter. Those tax forms don’t disclose non-payment of the tax due – the notices go to the dealer and the CPA just didn’t have it on their radar to check, which is somewhat common. (Sidebar: ask your CPA if they check this).
In the end, the dealership failed to pay $346,775 in withheld employee payroll taxes to the Internal Revenue Service over a span of five years, from 2016-2021. The controller plead guilty in federal court to a charge of willfully failing to collect or pay over tax, a felony that can carry a prison sentence of up to five years. However, prosecutors have stated they are focused on payment and not jail, noting that after she explained the situation in court it was understood by all parties that this was mismanagement, not an effort to defraud.
NOTE: I really feel for this controller and it’s one of the reasons I decided to write about the situation. I’ve known people in her spot. It’s such a terrible place to find yourself and I’m glad things are getting worked out.
Sadly, the dealer knew nothing of the tax issue or non-payment until the day of the guilty plea, when his wife called to tell him she was on the way to court and explained the situation.
This story underscores a fundamental truth that in the complex ecosystem of dealership accounting, meticulous financial oversight isn’t just good practice—it’s essential for survival.
There are no natural disasters here.
One positive takeaway in this and other scenarios like it is that people create these problems and people can fix them.
Let’s explore how a series of overlooked details can snowball into a serious tax issue or other breakdown, and how to fortify your dealership against similar pitfalls.
The practice of appointing a spouse as a dealership’s controller is not uncommon in car dealerships. However, this situation highlights the importance of ensuring that anyone in such a critical role, family member or not, has the appropriate experience and qualifications. Financial management in a dealership is complex, and even well-intentioned individuals can find themselves overwhelmed if not properly prepared.
Interestingly, after this story came to light, several industry professionals shared with me similar situations and just like me, they agreed that they’ve occurred more frequently than one might expect. This suggests that the challenges faced in this case are not entirely unique, and that there may be systemic issues within the industry that need addressing.
This could’ve easily happened with a controller who was not a spouse.
This situation can happen to anyone, yes anyone. When faced with a decision on who to appoint as the dealership’s financial manager, it’s incredibly easy to make the wrong choice. Due to the highly-specialized skills required in dealership accounting, it’s not like there are hundreds of choices available. I wrote about the dealership controller shortage here.
The controller’s role is particularly crucial in car dealerships due to the high-value inventory, complex financing arrangements, and the need to manage multiple profit centers within a single business. Their expertise directly impacts the dealership’s financial health and long-term success.
Car dealership accounting skills do not grow on trees. There are very few ways to learn dealership accounting and even less with controllers/management positions. There are basically three options for those who want to pursue it as a career:
- Learn on the job (self-taught)
- Being lucky enough to find a boss who will mentor
- Pay for specialized training or mentoring (which is something I do)
Many dealers (and most new dealers) are reticent to admit that they don’t know a lot about their accounting. This means that in some cases, it’s the blind leading the blind when it comes to keeping the dealership financially healthy. More often than not, this only becomes clear when something traumatic happens (ie: law enforcement walks into the showroom asking for the owner).
Disasters happen when dealership accounting knowledge is scarce. Don’t believe me? Here’s just one case.
An ambitious but inexperienced service cashier notices how much more money she can make being a controller. She devises a plan and succeeds at becoming the controller at a public auto group. About a year later, the store she was working at, began to sell more cars than they ever had before. Now, that’s usually a good thing but in this case it was a warning sign.
After a year or so, it was revealed that an organized crime group had targeted the store and was able to “buy” a total of 80+ cars over several months, each vehicle was loaded with all the extras like custom wheels and tires adding $13K to the deal. Sounds fishy, right?
If an experienced dealership controller had reviewed even one of the deals, it would’ve been clear something was wrong.
- There were too many similarities in the deals.
- Too much gross profit for it to be real.
- Each customer was too willing to say yes to everything.
It was truly the case of “If it seems too good to be true, it usually is.” But, because the cashier-turned-controller didn’t have any real experience, or a nose for the red flags, all those cars were driven off the lot, never to be seen again.
Thankfully, a veteran controller/CFO was tasked with handling the clean up and after many months of work, she was able to retrieve most of the cars. But none of them came back in great shape, causing even more expense to the store.
Hiring decisions and their consequences.
It’s never really a good idea to have one’s spouse as the controller. That said, I understand intimately why a dealer or a husband/wife team would choose to do it. The best practice is implementing structure and clear procedures to make sure the dealership never finds itself in hot water and to keep the peace at home.
One’s spouse as controller is problematic for several reasons:
1. Conflict of Interest: It’s important to choose wisely when it comes to any position in the dealership but there’s an added layer of precaution when it comes to the person who handles the money. Appointing a close family member, particularly without oversight, can lead to all sorts of issues. The choice should be above reproach, and appointing a spouse or family member can become conflicted. An example is that it’s natural for the emotional bond to cloud judgment, which makes it difficult to address financial mismanagement objectively.
Alternative: Hire an experienced controller or promote a qualified candidate. Implement procedures where they can easily keep the spouse or family member in the loop. This removes the conflict and introduces a separate set of eyes watching over the money. I’m a big fan of dual and triple control.
2. Lack of Financial Expertise: If a controller lacks the necessary financial expertise and experience, it makes her/him ill-equipped to manage the company’s financial responsibilities effectively. Expertise in dealership operations, financial management and tax compliance is crucial for such a role.
Remedy: Invest in targeted training or coaching and some professional development. Whether the controller is a spouse or not, coaching and development are great ways to gain financial knowledge. I recently was in a meeting where it was clear to me that the controller didn’t actually know how to book rental vehicles (Inventory, depreciation, curtailments and loan payments). I approached her later and offered some friendly non-judgmental guidance, which she was very open to, and the result was that she now knows how to book rental vehicles!
3. Lack of Managerial Acumen: While a spouse may be trustworthy, if they have not managed before, they may lack the ability to make sound judgments and quick decisions. The car business never stops (it’s retail, for cryin’ out loud) and managing employees, customers, vendors, regulators and the factory is not a skill possessed by everyone.
Remedy: A controller’s job is to manage the dealership accounting office, which means managing people, not just the books. I have observed that many controllers perform their best work independently. This is often because they are more task-oriented than people-oriented, which aligns well with the meticulous and detail-focused nature of their job.
Controllers may struggle with managing people, as it can be overwhelming to handle interpersonal dynamics along with their usual responsibilities. However, specific strategies can help them adapt to these challenges. These strategies include:
- Developing strong communication skills.
- Setting clear expectations and accountability follow up.
- Leveraging delegation techniques to manage workloads effectively.
Also, providing leadership training/coaching and fostering a supportive team environment can help a controller become more comfortable and effective in their managerial roles.
4. Over-Reliance on One Person: Placing all financial control in the hands of one individual, especially without regular checks, increases the risk of errors and fraud. This concentration of power can lead to significant oversights, as seen in this case where the payroll taxes were not paid. Also, with one person controlling everything, it makes it super hard to go on vacation with your spouse!
Remedy: Implement a system of checks and balances within the financial control process. This includes segregating duties among multiple individuals to distribute responsibilities and reduce the risk of errors and fraud. Regular independent reviews should be conducted to ensure accuracy and compliance.
5. Lack of Transparency: In the payroll tax situation mentioned earlier – and in many other cases where the controller was either a family member or inexperienced, or both – the dealer/owner was unaware of the tax issues, indicating a lack of transparency and communication within the organization. Again, this doesn’t necessarily apply to only spouses and family members – it can happen to anyone. Regular financial reviews and transparent reporting mechanisms are essential to keep all stakeholders informed and involved in decision-making.
Remedy: It’s essential to develop rapport between the owner/GM and the controller. The most successful organizations typically have this one thing in common: The owner/GM and the controller are a united front. Both must agree – and generally do organically – for any significant changes in operations. When there is strife between these two players, that is usually an indication of issues within the organization such as lower sales, higher expenses, late financial reporting, uncollected receivables, poor customer experience and high employee turnover.
Nothing is 100% but you can get close with the right people and systems.
Like I said earlier, there are no natural disasters here. Every single problem can be remedied when it comes to people and processes. All it takes is a willingness to explore different approaches to what’s currently not working.
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