Getting payments under control: AP recovery audits

Register now

What is an accounts payable recovery audit?

Quite simply, it is a review of a company’s accounts payable historical data for the purpose of identifying and recovering funds paid to 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 and escheatment avoidance, among other areas.

Why conduct an AP recovery audit?

Most organizations have great controls, people and systems in place. However, in this complex environment, no system or individual operating within the procure-to-payment cycle is 100 percent 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.

An AP recovery audit should be a simple, unintrusive process, where the majority of the audit can be conducted off premise, requiring minimal involvement of the company’s AP 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.

The goal of the audit is to identify and capture lost profits due to errors within an organization’s procure-to-payment environment. Recoveries from suppliers can vary based on numerous factors; however, on average, companies can expect recoveries to be approximately 0.1 percent or $1 million for each $1 billion in annual revenue. Additionally, each audit will provide the company’s internal audit team with the identification of systemic or procedural weaknesses and, make recommendations for business process improvements to mitigate future risks.

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 AP 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 AP recovery audit can result in a significant amount of supplier overpayments and under deductions from going unrecovered.

A postponement of, say, six 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 the organization’s bottom line.

A true win-win

An AP recovery audit delivers results in two important ways. The first is the identification and recovery of overpayments to your suppliers. The second, and to some, arguably the most important, is the identification and determination of the underlying root cause that allows for the supplier overpayments. A thorough and complete project should include the issuance of a comprehensive management report that provides a full accounting of all overpayments and a detailed explanation of how and why they occurred. The observations and recommendations should be specific to the audited organization.

With proper planning and the right partner, an AP recovery audit can and should be easily integrated into day-to-day tasks, and be completed within months, not years. There should be no departmental burden, but only the pleasant task of adding funds back into cash flow and identifying systemic weaknesses.

For reprint and licensing requests for this article, click here.
Audits Corporate governance Accounting firm services