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Recovery Audit 

The practice of performing recovery audits originated in the early 1970's, during a time of increased commerce for the retail industry. A growing network of national chain stores, led to a rise in competition for shelf space from suppliers. Large companies had a difficult time keeping track of the many different vendor price points, rebates, and other various discounts. 

 

Though it has become a priority since, keeping track of such details was not an integral part of purchasing departments. Such oversights led to a substantial amount of lost revenue going unnoticed. Financial minds went quickly to work selling their services to accounts payable (AP) departments in companies all over the country.

 

Since its inception, the AP recovery audit industry has consistently redeveloped new and innovative ways to search for payment discrepancies within a client’s AP data file. With few exceptions, recovery auditing works on historical data sets. Most commonly, enterprises that are undergoing a recovery audit will employ a third party firm to review the transaction files from six months to three years in the past.

 

Over the last years AP departments have benefitted from a host of new services and tools that help to further refine their processes and decrease the number of errant transactions. The combination of these preventative tools as well as recovery auditing services has given AP professionals a great strategy to nearly eliminate profit loss.

 

 

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7 Recovery Audit Best Practices

Is your firm getting all the value that it can from its recovery audits? Applying these best practices will lead to more efficient and productive audits.


Clearly outline your recovery audit firm’s estimated scope

As a starting point, you should outline the audit’s estimated scope and time frame, as well as other parameters, and communicate this information to both your own employees as well as the audit firm. For instance, you’ll want to let the recovery audit firm know if any departments or certain types of transactions, such as T&E reports, will be kept out of the audit. It also helps to discuss just how far back in time the review should go. These conversations help prevent “project creep,” and provide all parties with an understanding of the expectations. Similarly, you’ll want to discuss with the audit recovery firm whether the work will take place on- or off-site. In addition, it makes sense to establish a time-line the recovery audit firm will follow in providing updates on its progress. 

 

Establish a workflow before the project

It also is smart to establish a recovery audit workflow at the outset. This should identify the role of each person involved in the audit, as well as the steps each transaction should go through. That way, the auditor can quickly identify the person to contact with any questions on particular transactions, and will understand the process that needs to be followed. This can prevent mistakes and misunderstandings that eat up time and waste money. As part of this step, you’ll want to determine the internal resources you’ll need to dedicate to the audit. For instance, will several of your AP specialists need to spend time each week on the audit? Will your systems employees need to provide assistance so that the recovey audit firm can access the information it needs? Thinking through these issues upfront helps the process run more smoothly. 

 

Have your recovery audit firm review claims with the vendor directly

This allows your supplier to check its records for any information that might indicate that a credit actually is not warranted. A bit of communication early on can prevent misunderstandings and aggravation, and will help you maintain a strong relationship with your supplier. While you want to capture all the money your firm has coming, you don’t want to poison the relationships with your vendors.

 

Provide suppliers with documentation when presenting recovery audit claims

This will make your case more compelling. At the same time, it should speed the recovery process, since your supplier can use the information as a starting point when doing its own research. A quicker recovery means a stronger cash flow.

 

Encourage your Recovery Audit firm work within a timely scope

Evaluating transactions that have occurred within the past year or so, when the information is readily available and fresh in everyone’s minds, is going to be more productive, as well as less time-consuming and frustrating, than trying to get to the bottom of transactions that occurred several years earlier. Moreover, Section 404 of Sarbanes-Oxley requires publicly held companies to attest to the effectiveness of the company’s internal controls each year. That’s yet another reason to ensure that you and your audit recovery partners are reviewing transactions in a timely manner.

 

Tap into your recovery audit firm’s expertise 

A reputable recovery audit company will have seen numerous accounts payable processes and have identified practices common to top-performing AP departments. While each accounts payable process is unique, chances are that at least some of these can be adapted or adopted by your firm. Moreover, when the auditors offer suggestions that end up streamlining and reducing the cost of your accounts payable operations, it boosts your firm’s bottom line just as any credits they uncover.

 

Follow through with the recommended improvements

While it may be tempting to view the improvements as nice to consider, but not really necessary – thinking that you can always capture any future over-payments in the next audit – that’s being short-sighted. By paying suppliers the correct amount from the start, rather than overpaying and having to chase your money later, your firm reduces its expenses and protects its cash flow.

 

Consider a range of potential payment arrangements

Although contingency fees are common in the recovery audit world, other options exist and can offer compelling benefits. Flat-fee arrangements, for instance, usually lead to more committed audit partners. That’s because contingency fees can lead auditors to shy away from suggesting improvements that could reduce the amounts of your overpayments – and their audit fees. In addition, flat-fee arrangements provide greater predictability in expenses than contingency fees. That’s particularly important when credit and financing are tight.

Applying these best practices will boost the efficiency and productivity of your recovery audit. What’s more, they can enhance your overall accounts payable operation, so that your firm gains all the value a recovery audit can provide. 

 

 


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