An Accounts Payable Recovery Audit, or AP Audit, analyzes recorded data for Accounts Payable. This is usually done using proprietary software that handles data analysis without interfering with day-to-day business activities. This review helps identify overpayments, insufficient discounts, duplicate payments, pricing errors, unclaimed supplier credits, and more.
Why Do An Accounts Payable Recovery Audit?
Even if you feel your organization has perfect controls, systems, and people, there are still plenty of reasons to take the time to conduct an audit. The truth is that no system or person operates on a buy-to-pay cycle that is entirely error-free. Every ERP system and the legacy system has the opportunity to bypass established controls.
Communication between purchasing, goods receiving, accounts payable, and your suppliers work most of the time, but there will always be times when it fails. Your system is designed to pay the bills efficiently, but some companies need to be noticed in a high-volume organization. Over time, mistakes can eventually lead to significant losses, even in a small percentage of trades.
There are many benefits to performing a recovery audit. While the main advantage is finding funds, you can also identify operational loopholes, take control of the company, ensure compliance with contracts, reduce the risk of fraud and prepare for state audits.
Benefits of Recovery Audit
Money found
It is estimated that for every $1 billion in revenue, a company generates, it may overpay by $1 million. Of course, the money found is worth the time and resources invested in checking it out, but that’s not the only reason to consider adding it to your routine.
Identify operational gaps
Gaps develop over time, and AP departments often experience creep. As departments grow, new branches are added to the system, and technology changes, maintaining efficiency becomes more difficult. Audits can help identify and resolve issues in the procure-to-pay cycle.
Contract in the company
When you discover an overpayment, it’s usually because too many people were involved in the process. If a company uses multiple non-integrated payment systems, each of which can be accessed by multiple departments, it’s easy to see why overpayments can occur. By switching to a consolidated billing system, you can have more control and reduce the risk of double payments.
Maintain compliance with the contract
Due to the legal aspects involved in negotiating, drafting, and signing a contract, preparing a contract takes a lot of time and effort. Organizations can easily overlook contract details without a centralized system, especially if multiple suppliers need to be tracked.
For example, a manual review of contracts can lead to chargebacks because it is easy to bill for something that should have been free under the contract. After all, the agreed-upon volume discount was never given. Contract compliance audits can also help prevent future overpayments.
Reduce the risk of fraud
When departments are not operating as efficiently as possible, the risk of fraud is multiplied. An accounts payable audit will uncover weaknesses in the system and red flags so they can be addressed.
Prepare for State Audit
Although the audit firms process is voluntary, the state may wish to take a closer look at your books. By performing recovery audits regularly, you can prepare ahead of time for the possibility of a status audit.
What does an audit include?
The Accounts Payable Recovery Audit reviews all recorded seller spending. It’s easy to see everything from a bird’s-eye view using the reports inside VVAS. Two- and three-way matching capabilities ensure APs can determine who ordered what, received it, and only pay for orders received.
Because VVAS integrates accounting solutions and ERP software, AP employees can easily handle audits themselves rather than having an external agency handle them. Although many agencies have a contingent fee, which means you will only pay once the financial benefit is realized, an internal audit is often the better option for many organizations.
Recovery Audit Forecast
Audits will identify and recover lost profits due to errors in the buy-to-pay process. On average, chargebacks represent 0.05% to 0.1% of revenue, which may not seem like much. However, when it comes to $1 billion in revenue, that equates to $500,000 to $1 million. The revenue numbers may be less impressive for small businesses, but since every penny counts for continued operations and growth, they can still pack a punch.
While the primary goal of this type of audit is to recover money lost through overpayments and improper seller credit, it has various other benefits. Since you can use it to detect and resolve inefficiencies in your operations, you will have greater efficiency and productivity, reducing risk and maximizing cash flow.
Audit services are available for those who want a third party to process on their behalf, and come with a contingent fee, so only pay if you generate income.
Tips for conducting a payment recovery audit
Shared accounts payable errors such as overpayments, double payments, pricing errors, miscalculated taxes, and currency conversion errors can cost businesses millions of dollars.
Other AP failures that result in lost dollars include lost chargebacks due to late payments and seller fraud. AP departments may conduct chargeback reviews regularly to avoid (or recover from) potentially significant losses.
The chargeback audit provider identifies and corrects payments for purchase transactions going back six years. Organizations undergoing these audits recover funds and gain unique information to improve their transactional processes.
For example, the Community Health System, which serves nearly 230,000 residents in 15 counties, recently underwent a chargeback audit. As a result, the organization’s accounts payable manager audits the department’s performance and determines if anything needs to be added to the payment process.
The health system contracts external audit recovery vendors to audit accounts payable. The supplier looks for credits that the AP may need to learn about and looks for any overpayments that the AP may have made. Auditors reviewed three years of accounts payable transactions.
Steps to Success
The AP manager and the accounts payable accountant were the only people in the organization involved in the audit besides the two auditors. Here are four steps they are asked to follow that are common in recovery audits and can be expected by other AP professionals performing recovery audits:
Handle documents and records.
AP ensures that all accounts payable records for the previous three years are available for auditor review. The AP also provided a list of the organization’s suppliers and contact information.
Coverage of Legal Basis.
AP will need to provide an authorization letter for the seller to sign, allowing AP to provide the information in the statement to the audit recovery company.
Site visits are available.
Auditors come to the site three times, each for about a week. The AP must be present when auditors require assistance on-site.
Communicate regularly.
The auditors and AP corresponded by phone and email regarding the auditors’ findings during the site visits. In addition, the associated press checked any credits or overpayments that auditors found to ensure there was a problem.
The chargeback review took about six months from start to finish. Resuming audits requires little preparation from the AP. The AP is only required to ensure that all submitted information is up to date and can provide any assistance the auditor may require throughout the process.
Tips for Other AP Professionals
As far as the organization is concerned, the benefits of payment recovery audits fully justify the effort. The significant investment in AP is time. However, since auditors typically work on a contingency basis and are paid a percentage of the actual recovery, the cost is not an issue.
Audits are often required to detect issues with processes and procedures that may allow APs to recover lost balances or overpayments. For example, not all providers will notify the AP if there is an unrecorded balance on record or if you overpay. Likewise, not all providers will send account statements unless you request them. Recovery audits identify these issues and allow AP to learn from any mistakes that may have occurred, for example, during shifts or partition rotations.
Hire expert auditors for your firm today
In any audit scenario where issues and errors can be identified, it is easy to take defensive measures. However, an important thing to remember is that recovery inspectors can help AP find funds that belong to your organization. Work with them and learn from them. They’re not there to point fingers. Instead, they are there to help AP restore revenue and help improve its operations.