Have you heard the term ‘you are only as good as your most recent result’? This is true of finance departments and in particular Accounts Payable functions. Participating in a Recovery Audit is very important in uncovering errors but also identifying areas for improvement to reduce future leakage.

However, to really reap the benefits of this process it is best practice to have a recovery audit at regular intervals, ideally annually. Let’s recap.

What is the purpose of an A/P Recovery Audit?

Ensure payment accuracy and eliminate financial leakage.

The recovery audit process prevents organisations from losing money every year due to financial errors, like:
Unrealised credits,
Duplicate payments,
Cash on account
Discounts and allowances not received, and
Overpayments.

To identify areas of opportunity to improve operational efficiency.

Along with uncovering monetary discrepancies, the recovery audits can also serve to uncover areas to improve operational or financial processes.

Over time it is common for operational gaps to develop within accounting and audit processes and procedures. During a recovery audit review all findings and root causes are recorded and analysed for trends. A large part of this process is identifying operational weaknesses and applying remedies.

Recovering lost money is important. However, it could be argued that reducing the future risk of losses is even more so. By learning from audit results is it possible to highlight the areas of future risks and improve controls to reduce or eliminate them altogether.
Another benefit of recovery audits is the potential improvements to sourcing, procurement, and supplier relationship management.

Key Benefits of Recovery Auditing

Recovery Audits can improve your bottom line.

The most important benefit of recovery audits is that it increases cash flow and pure profits through the identification of revenue leakage.

Recovery Audits can contribute to operational efficiency.

By identifying operational gaps and areas of financial leakage, recovery audits offer a unique opportunity to remedy these issues and make an organisations internal processes more efficient.

Recovery Audits can mitigate the risk of fraud.

By investigating deep into a business’s financials, the recovery audit process uncovers errors, performs a root cause analysis, corrects the error, and prevents the issue from happening again. As a result of this enhanced analysis, recovery audits effectively close the window of opportunity for financial fraud.

Recovery Audits can prevent future leakage.

The ongoing benefit of recovery auditing is that the process finds all the gaps in your financial processes. Identifying internal mistakes such as payment issues, contract noncompliance, or incorrect information, can help businesses correct the errors and take action to prevent future mistakes.

Recovery Audits can assist with compliance.

Incorporating a recovery audit regularly into an organisations financial calendar can assist in the compliance of regulations set by authorities or internal stakeholders. It can provide evidence of an organisation’s commitment to process review and improvement.

Summary

Organisations in all sectors who process more than 50k third party invoices per year and/or have third party spend over £250m should consider an annual A/P Recovery Audit as best practice.

I recommend leveraging a specialist provider who has the experience, tools, and expertise to deliver the review without impacting heavily on day-to-day accounts payable activities.

The rewards of such a project can be high, with the risks minimal due to the opportunity to work on a contingency basis.

The question is – why wouldn’t you?

Accounts Payable Recovery Audits first came to prominence in the 1990’s. Originally a very manual based labour-intensive project, things have progressed dramatically due to the introduction of specifically designed applications and highly skilled audit professionals.

Whilst still considered a niche industry, the majority of large organisations have been utilising these services for many years, enjoying the cash return benefits but more importantly as a vehicle to analyse and improve the Accounts Payable performance.

It’s happening in the background

By the sheer nature of an Accounts Payable Recovery Audit being a service to recover lost profits, it is not readily publicised. However, it is seen as a best practice by many finance leaders.

Historically only used by the largest organisations

In the past this type of service was only available to the largest organisations, simply because the third-party invoice spend and transactional volumes needed to be high in order for service providers to run viable projects.
However, with the development of technology and specialist providers with knowledge of multiple industries this is no longer the case.

Which organisation should consider a recovery audit?

Organisations in all industries and sectors should consider an accounts payable recovery audit. However, organisations meeting the below criteria should consider it a standard best practice:

Annual invoice volumes over 50,000 and/or:

Annual 3rd party spend over £250m

Why consider a 3rd party for the recovery audit project?

Due to the nature of a recovery audit project, it can often be beneficial for the review to be carried out by a 3rd party organisation due to impartiality. When reviewing errors, a 3rd party will have a complete unbiased approach which leads to the best results.

It is also common that internal audit or accounts payable teams simply do not have the resources, expertise, or technology to dedicate to this type of project.

In many case 3rd party recovery audit firms are paid only on a contingency basis on the results of their findings. This makes it a risk-free project.

Auditing your Accounts Payable is a routine necessity to ensure you’re not losing money to errors or fraud. An accounts payable audit doesn’t just reveal overpayments that you can pursue to recover money; it can also be used to identify common errors so you can take proactive measures to prevent them from continuing to happen. Here are five steps to run an accounts payable audit:

Step 1: Establish the Scope of the Audit

The first thing you need to do is refine the scope of the data you’ll be collecting and analysing.

• Determine your timeline. How far back do you want to go? Two to three years is good, but anything further back than three years will probably be harder to recover.
• Identify which regions you’ll be looking at and in what order. Are you only auditing the spend in the UK, or do you want to look at Europe and North America too? Do you want to audit multiple regions simultaneously or split them up over time?
• Choose which business areas and spend types you’ll be looking at. For example, it’s not worth going after taxes or fees paid to government agencies. Depending on your company, there might already be a team dedicated to certain expense types, so looking into those would be a waste of resources.

Step 2: Acquire Relevant Data and Eliminate Non-Viable Vendors

Once you pull all the data that falls into the scope of your audit, correct any initial errors, and remove any vendors that you will not contact. Combine any duplicate vendor listings to aggregate spend so you have an accurate understanding of each account. For example, if you only spent £10,000 at CVS that might not be worth the cost of auditing and recovering, but if CVS has 20 vendor master records of £10,000, that’s£$200,000 and you might want to look at that. Based on your company size and the resources you have available, set a minimum spend amount for the companies you’re going to review. If the cost of recovery efforts would outweigh the results of the audit, it’s not worth auditing that account. Once you have that minimum in mind, remove any vendors that fall below that threshold. Additionally, remove any other vendors that shouldn’t be on your list like refunds, government taxing agencies and charities.

Step 3: Plan Outreach

Determine how you will contact vendors to verify overpayments. How frequently will those contact efforts be made? Who will be conducting the outreach? What communication channels will be used? Then create a template for the outreach, informing the vendors that you’re doing an accounts payable audit and asking for any information you need. While planning the outreach, inform any relevant parties that the audit will be happening. Get approval from relevant parties on who should and shouldn’t be reached out to. For example, if your legal department has a pending lawsuit with a vendor, they might not want you reaching out to that vendor. Additionally, make sure employees within your company know who to contact if they receive questions regarding the audit.

Step 4: Prepare for Statement Audits

While planning your outreach to inform vendors of the audit, also plan any statement audit requests you need to make so you can minimise touchpoints with vendors. Statement audits go hand-in-hand with duplicate payment audits. A duplicate payment audit looks at internal records and then reaches out to a supplier saying, “Our records indicate you owe us money.” A statement audit reaches out to the company and asks, “Can you tell me if you owe us money?” Conducting outreach for both audits together will save you time.

Step 5: Start the Audit

Finally, conduct the accounts payable audit. Comb through the data collected for irregularities and make sure you document the root cause of any overpayments, so you know what needs to be fixed at the end of the audit. If you find 1,000 errors, and 600 are due to duplicate vendors, then you know you need to fix your master vendor files. Don’t just write off those errors as an overpayment, because then you won’t know how to prevent errors from occurring in the future. The goal of your audit shouldn’t just be to recover overpayments. You should also be identifying trends and repeated errors so you can implement a solution to fix them.

Why consider a 3rd party for the recovery audit project?

Due to the nature of a recovery audit project, it can often be beneficial for the review to be carried out by a 3rd party organisation due to impartiality. When reviewing errors, a 3rd party will have a complete unbiased approach which leads to the best results.

It is also common that internal audit or accounts payable teams simply do not have the resources, expertise, or technology to dedicate to this type of project.

In many case 3rd party recovery audit firms are paid only on a contingency basis on the results of their findings. This makes it a risk-free project.

Even though most organisations have implemented robust accounting and payment processing systems, errors still exist. In today’s world it is common for organisations to operate multiple systems, ERPs, business entities and locations. This complexity brings challenges in designing processes and procedures that cover all eventualities, as well as making effective vendor communication difficult. Naturally, there is also the occurrence of human error, which is largely unavoidable.

Here are 5 reasons you should consider a recovery audit:

1. Recover Lost Money

By conducting a comprehensive recovery audit, organisations are able to recover money lost. This can be in the form of unrealised credits, identification and collection of overpayments, the recovery of cash on account, rebates, and unapplied discounts.

2. Detecting Operational Weaknesses

Over time it is common for operational gaps to develop within accounting and audit processes and procedures. During a recovery audit review all findings and root causes are recorded and analysed for trends. A large part of this process is identifying operational weaknesses and applying remedies.

3. Reducing Future Risks

Recovering lost money is important. However, it could be argued that reducing the future risk of losses is even more so. By learning from audit results is it possible to highlight the areas of future risks and improve controls to reduce or eliminate them altogether.

4. Compliance

Incorporating a recovery audit regularly into an organisations financial calendar can assist in the compliance of regulations set by authorities or internal stakeholders. It can provide evidence of an organisation’s commitment to process review and improvement.

5. Fraud

If the department of an organisation is not audited from time to time, then your business is at greater risk of fraud and financial malpractices. The recovery audit process can be essential in identifying both internal and external risk factors.

Which organisation should consider a recovery audit?

Organisations in all industries and sectors should consider an accounts payable recovery audit. However, organisations meeting the below criteria should consider it a standard best practice:
Annual invoice volumes over 50,000 and/or:
Annual 3rd party spend over £250m

Why consider a 3rd party for the recovery audit project?

Due to the nature of a recovery audit project, it can often be beneficial for the review to be carried out by a 3rd party organisation due to impartiality. When reviewing errors, a 3rd party will have a complete unbiased approach which leads to the best results.
It is also common that internal audit or accounts payable teams simply do not have the resources, expertise, or technology to dedicate to this type of project.
In many case 3rd party recovery audit firms are paid only on a contingency basis on the results of their findings. This makes it a risk-free project.