Accounts Payable Recovery Audits – What Are They and Why Should They Be Considered a Best Practice?
What is an Accounts Payable Recovery Audit?
Quite simply, it is a review of your Accounts Payable historical data for the purpose of identifying and recovering funds paid to your vendors and suppliers resulting from overpayments and under-deductions. The reasons for these erroneous payments are numerous and areas of recovery can include duplicate or wrong payments, open/unapplied supplier credits, unrecorded accruals/rebates/allowances, contract/purchase order terms compliance, pricing errors, missed discounts, unaccounted returns, transportation overcharges, escheatment avoidance, among other areas.
Why Should My Company Conduct an Accounts Payable Recovery Audit?
Most organizations have great controls, people and systems in place. However, in this complex environment, no system or individuals operating within the procure-to-payment cycle are 100% error free. Every system has vulnerabilities through the circumvention of established controls and communications failures between buyers and sellers.
The relationship that exists between suppliers, procurement, receiving and accounts payable is effective most of the time, but not all of the time. Although systems are designed for accurate and efficient payment of invoices, a percentage of leakage will always occur. These overpayments can easily add up to a significant amount and if not captured, will represent pure lost profit to your company’s bottom line.
What does an Accounts Payable Recovery Audit Entail, and What are the Costs?
To engage in an Accounts Payable Recovery Audit should be a simple, unintrusive process, where the majority of the audit can be conducted off premise, requiring minimal involvement of your Accounts Payable and company staff.
The review is an historical look at supplier spend, combined with a comprehensive audit process. It begins with the collection of data which typically requires a simple transmission of specific files without any need for special programming.
The data gets normalized and run through proprietary software to identify the potential overpayments. Auditors review and validate the data to identify recoveries for submission to suppliers for credits.
There is no risk to engage in the review because it is a 100% contingency based fee. There is no cost until you receive economic benefit for each recovery, in the form of a deduction from payment, or receipt of a check from the respective supplier.
What Results Should I Expect From an Accounts Payable Recovery Audit?
Each audit will identify, and capture, lost profits due to errors within your organization’s procure-to-payment environment. Recoveries from your suppliers can vary based on numerous factors, however, on average, you can expect recoveries to be approximately .1% or $1 million for each $1 billion in annual revenue. Additionally, each audit will provide your internal audit team with the identification of systemic or procedural weaknesses and, make recommendations for business process improvements to mitigate future risks.
What is the Downside?
There really is none. The Accounts Payable Recovery Audit is a 100% contingency based fee and should require minimal client staff time to support the review. It is a collaborative process that maintains confidentiality of sensitive information and utmost respect for your supplier relationships.
Internal Change Equals Risk
In the continuously advancing world of technology and automation, there are inherent risks. There are many areas within the procurement to payment transactional cycle that undergo complete conversions, upgrades and the introduction of new technologies. These improvements are advancing the goal of increased efficiencies, but often create vulnerabilities.
Revenue growth for many companies occurs through acquisitions and mergers. The process of integrating or “on-boarding” the acquired company increases the risk of duplicate and other forms of overpayments. A Procurement to Payment Recovery Audit of the acquired company data prior to on-boarding or “sunsetting” of the system, and the period immediately following the transition to a shared system, is highly recommended.
The Cost of Not Planning
It is universally understood that the majority of organizations are constantly challenged with time constraints to take on additional projects. It is a common misunderstanding that engaging in an Accounts Payable Recovery Audit can be time consuming. When delivered properly, a professional recovery audit firm will manage the entire scope of the project, with minimal time requirements of client staff.
While the total amount of recoveries are unknown, and the root causes of these recoveries are unknown, what is known is that delaying an Accounts Payable Recovery Audit can result in a significant amount of supplier overpayments and under deductions from going unrecovered.
A postponement of 6 months creates both a potential loss of overpayments for that period, as well as the root cause of those overpayments and under deductions going unrecognized, uncontrolled and continuing to leak funds. All too often a single transaction, or series of transactions that represented hundreds of thousands of dollars, are left sitting in a supplier’s account rather than in your organization’s bottom line.