How to Minimize the Risk of an Internal Audit of an Employee Sales Program

The best way to maximize resale proceeds, thereby minimizing depreciation, is by selling vehicles to employees. Fleet managers can price vehicles above traditional wholesale values, but below what employees are able to buy in the retail market. In addition, employee sales are faster, which translates into a faster application of the financial proceeds.

Since many fleets fund vehicles using an operating lease, employee sales should be fair market value sales transactions. There are several major used-vehicle residual guides fleet managers use to determine fair market value. Some are strictly wholesale price guides, while others offer a combination of wholesale and retail prices. To make employee purchases attractive, fleet managers will most often use what is known as “wholetail” pricing — pricing that falls between wholesale and full retail.

Unfortunately, fleet managers don’t often see many of the vehicles they manage. They depend upon condition reports, vehicle histories, and photos to tell them the condition and mileage of a particular vehicle. Most of the used-vehicle resale guides will show an average base price, and allow the user to add or deduct value depending on condition, equipment, mileage, and, sometimes, regional adjustments. A fleet manager should ensure the vehicle’s fair market value is documented and that the transaction is completed at that fair market price. There should be no special allowances made, because those situations become problematic under review by a skeptical auditor. It is always easy, after the fact, for auditors to second-guess earlier transactions.

Fixed vs. Negotiated Prices

There are two ways to sell a used fleet vehicle to employees — at a fixed price or through a negotiated sale. If a bidding procedure is used, a fleet manager must develop a process that allows employees and others to submit bids on vehicles within specified parameters. When only one bid is received, it is important the price be within a range of a fair market value. A floor should also be set based on the vehicle’s fair market value at the time it is offered for sale.

The bids should be accumulated and reviewed by two people to confirm the best offer is accepted. Have two people in the department sign off and confirm that it is indeed the best offer. It is important to keep a record of all offers. Retain a copy of the sales notice with your documentation. It is also good to remember that auditors, by their nature, are skeptical. This reality is best summarized by the adage that “the faintest ink is better than the best memory.”  This is a good practice to follow. For instance, a fleet manager has a lot going on in a busy fleet department, so a year later, and maybe several hundred cars afterwards, he or she may be hard pressed to justify a questioned transaction for a particular vehicle. It is ideal to be able to pull out the file and say: “Here are the signatures of two people in the department. Both looked at the offers. Here are all the offers, here is to whom we sold the vehicle, and, as you can see, it was sold at the highest offer.”

Compliance with the Sarbanes-Oxley Act of 2002 is mandatory for all publicly traded corporations. Under the federal law, corporations must eliminate all conflicts of interest, establish processes to ensure honest corporate disclosure, and govern with greater accountability. Furthermore, the legislation mandates accuracy of a company’s financial reports, requiring finance departments to better understand the true picture of a company’s inventory and assets, such as with fleet.  How a fleet complies with Sarbanes-Oxley (SOX) depends on whether it constitutes a material part of its company’s financial processes. It is these companies that are the most likely to include fleet operations in their SOX-compliance audit.

Avoiding Exceptions

When selling out-of-service fleet vehicles to employees, companies need to ensure fleet policy is uniformly applied — without exception — and that all buyers are treated uniformly and consistently. If a driver is quoted a price that doesn’t properly reflect the actual mileage and condition, the fleet manager should carefully consider the possibility of adjusting the price accordingly. But, most times, a price is the price, and the fleet manager should hold his or her ground. Sometimes there is simply no room for negotiation. If the driver/employee’s offer is far below the wholesale price, it may be clear the best option is selling the vehicle on the wholesale market.

However, when the selling prices of used company vehicles are negotiated individually with employees, rather than sold at a fixed price, there may be a perception that not all employees are treated uniformly under fleet policy. This is especially the case if certain employees receive preferential pricing in the purchase of out-of-service fleet vehicles. Although primarily an ethics issue, if a fleet manager is actively involved in individual price negotiations, it is prudent that he or she documents the procedures for this corporate policy. Auditors want to ensure that fleet policy is being enforced uniformly and consistently throughout the organization.

A company vehicle is a valuable corporate asset. Consequently, senior management must approve the employee resale process and, once approved, a fleet manager must follow it very strictly.

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