The AP recovery audit industry was created decades ago to review AP data for errors and discrepancies. In a traditional AP recovery audit, a team of highly-trained auditors works with a company’s AP staff to identify errors related to contract compliance, missed discounts, and pricing errors. In conjunction, the traditional recovery audit may include a review of AR records for a small subset of the company’s top suppliers to identify open credits on supplier records.
This process, known as “vendor statement auditing,” is performed manually in a traditional recovery audit and focuses only on the largest suppliers. This narrow focus results in vendor statement auditing claims that account for a small percentage, around 5%, of recoveries found by the traditional audit.
In the past ten years, Technology and automation have enabled a new way to approach to auditing vendor statements. The biggest challenge with successfully executing a large-scale supplier AR review is managing communication and outreach with mass volumes of suppliers.
This demands an automated vendor statement audit process that is capable of reaching out to the breadth of a company’s supplier population to request, collect and analyze AR data, resulting in significantly higher statement claims than the traditional approaches. Successfully executed, a supplier AR audit taps into an entirely new source of dollars due back to your company.
As an illustration of the different approaches to statement audits, let’s look at the techniques used to drill for oil. In the past, most oil wells were sunk in known oil fields. Just as geologists know the rock formations that indicate the presence of large oil fields, a traditional accounts payable recovery audit would reach out to a company’s largest suppliers in a statement audit to identify open credits. However, the easy to locate and tap a reservoir of oil is not the only opportunity. Using more sophisticated technologies, oil companies are today tapping into less accessible geological formations and extracting oil they could not economically reach in the past.
Similarly, an automated, technology-based statement audit can reach a vast new set of supplier accounts receivable records and identify a previously untapped pool of credits due back to a company.
It is important to note that a traditional, AP-focused recovery audit and a comprehensive statement audit can be complementary. The first is focused on reviewing a company’s AP records for discrepancies, the latter centers on reaching out to a company’s suppliers to review their AR records. Executed successfully, these combined audits can nearly double the recovery dollars for a company.
This post provides an overview of recovery audits and clarifies the differences between traditional AP recovery audits and modern comprehensive vendor statement audits, demonstrating how these two approaches can be used as complements. It presents user scenarios that illustrate the value of a dedicated statement audit and outlines statement audit best practices that a company should expect from a statement audit firm.
The post concludes with the benefits derived from implementing a statement audit process along with the associated key drivers of the return on investment (ROI).
Large enterprise accounts payable organizations manage millions of payments to thousands of vendors each year. Business changes including mergers, acquisitions, consolidation, and centralization, as well as new systems and automation mean that 100 percent payment accuracy is nearly impossible – even for AP organizations with the strongest controls.
Complex purchasing environments, high transaction volumes, and complex pricing lead to accounting errors, lost discounts, and improper pricing. Even 99.9% accuracy leaves a million dollars for every billion dollars of spend that is available to be recovered.
Traditionally, the largest percentage of recovery dollars resulted from allowances, pricing, and rebates, including:
In addition, there are processing errors, including multiple payments on an invoice, miss-applied credits, and errors in vendor master data. There are also adjustments to post-settle which may include returns, refunds, and warranty issues. These types of transactions and anomalies multiply based on the volume of suppliers and purchasing transactions at a company.
To identify the highest percentage of anomalies and recover the most dollars, it is necessary to investigate both a company’s internal AP data and processes, as well as its suppliers’ AR data and processes. This paradigm shift involves improving data quality for both the buyer and seller, while improving processes, and recovering more dollars. To better understand this, a review of the recovery industry is required.
The AP recovery audit industry began 40 + years ago as a service focused on the historical accounting systems and records of a company’s AP department. Initial adoption took place in the retail industry where stringent compliance requirements, extensive use of promotions to drive sales, and a high volume of transactions afforded an environment ripe with errors. Recovery audit firms were able to find significant dollars for retail companies by deploying teams of auditors to review their accounting system, and purchasing data and processes.
As recovery audits evolved, companies realized that the same errors found in retail existed across industries. In any industry with a high volume of transactions in the procure-to-pay process and a large volume of suppliers, companies inevitably will have transactional errors especially related to complex supplier invoices. Over the years, the practice of recovery auditing expanded to manufacturing industries and beyond.
Today, the traditional AP recovery audit is performed for a fixed time frame (commonly every year or two years) as a 3-6 month project. A team of highly-trained auditors works with the company’s AP staff both on-site and remotely to review their data (including AP, GL, Purchasing, Receiving, invoice file, balance sheet, and more) and identify errors related to contract compliance, missed discounts, and pricing.
Most AP reviews are performed manually, however, some firms have created Technology and algorithms to identify common AP and purchasing issues and anomalies.
In conjunction, the traditional recovery audit generally performs a statement audit (review of supplier AR records) for a small subset of a company’s top suppliers (usually 5-20%). Think of this as the low-hanging fruit where 80% of a company’s spend lies with the top 20% of suppliers. Historically, about 39% of potential credits reside with the top 20% of a company’s suppliers.
Like the AP recovery audit, this traditional statement audit review is a manual process, with one or two postal mailings sent to suppliers, potential phone follow-up, and manual tracking of supplier compliance, statements, and credits. The statement claims from a traditional AP recovery audit deliver only about 5% of the recoveries found by the audit.
Results of traditional AP recovery audits are most commonly delivered at the end of the audit as hard-copy reports to a company’s AP department, though some recovery firms now provide online interfaces to review reports and findings.
The untapped potential in the traditional AP recovery audit is the breadth of the supplier AR audit. Reviewing only the top 5-20% of a company’s suppliers in their statement process leaves 61% of statement credits in the remaining 80% of a company’s supplier population untouched.
This 80% segment is virtually impossible to reach by traditional methods due to the challenge of managing the outreach and processing with a mass volume of suppliers. Traditional AP recovery audit firms lack the Technology that is required to automate the process of outreach and compliance with mass volumes of suppliers for AR data. An automated, scalable statement audit process allows companies to tap into more recovery dollars.
A vendor statement audit is a practice of reviewing the AR accounting records of a company’s suppliers for un-offset credits. A comprehensive statement audit targets the breadth of a company’s supplier population to request and analyze AR data which delivers significantly higher statement claims than the traditional approaches.
As discussed above, the biggest challenge with successfully executing a large-scale supplier AR review is managing communication and outreach with mass volumes of suppliers. This requires an automated solution to manage the supplier data, orchestrate the outreach, and collect and manage incoming information from suppliers.
The comprehensive statement audit targets suppliers for 95% or more of spend, vs the top 5-20% of suppliers targeted by traditional AP recovery audits. When executed properly, a supplier AR audit taps into an entirely new source of dollars due back to a company.
Another benefit of an automated solution for comprehensive statement audits is that audits can be performed on an ongoing basis for a “rolling” time frame. This provides a “safety net” for a company’s AP department by performing a comprehensive supplier AR reconciliation on a regular basis, uncovering a continuous stream of credits.
When a statement audit performs ongoing outreach to suppliers and continuously tracks responses, it simultaneously collects and updates supplier information. The result is clean, up-to-date supplier data, as well as additional insight into supplier relationships and AR hierarchies. Ongoing statement audits also help proactively identify process issues with suppliers to reduce future reconciliation issues.
Implementing the following Best Practice Steps will lead to a successful statement audit:
In order to communicate with suppliers, the first step is ensuring you have the right data and communication preferences. Supplier data deteriorates quite rapidly, so it’s no small feat to keep your data clean and up to date. For an effective statement audit, you need a system that will manage supplier data, cleanse and identify issues, enrich with external data, and ensure contact information and communication preferences are up-to-date at all times.
Supplier compliance is an ongoing process; contacting suppliers just once is not enough. The statement audit process is analogous to collecting past due balances – outreach statistics show that multiple touches are required to drive maximum compliance. Using an automated, pro-active, multi-channel approach to drive compliance is critical to a statement audit.
With the mass volume of outreaches, statements and supporting documents, and verifications involved in a statement audit, Technology is essential to tracking and managing the process. Technology can ensure there is an easy way to track, manage, analyze and verify information sent to and received from your suppliers.
Visibility into transactions and credits across your supplier base enables you to identify accounting anomalies that occur after a transaction is settled. For example, expired products that are returned for credit after a three-way match will be caught by a statement audit.
Transactional errors with suppliers occur every day. A statement audit helps you find anomalies that your organization does not resolve in the first 120 days. Identifying and resolving issues on an ongoing basis, vs on an annual or biannual basis helps you to maintain better processes and uncovers more money left with your suppliers. A rolling four-month statement audit is a best practice.
The following steps will help your company identify the best statement audit solution to deliver the highest results on a continuous basis:
Make sure your statement auditor has the Technology to manage high volumes of supplier data, enable two-way communication, and capture and manage incoming supplier statements. Technology is the only way to support a comprehensive statement audit.
Your top suppliers only hold a percentage of the statement credits for your company. Pick a statement audit solution that targets the breadth of your supplier population and spend – driving more dollars back to your company.
Make sure the statement audit solution automates the processes from start to finish. This includes obtaining the verification of credits from suppliers before submitting them to you to prevent additional reconciliation.
Confirm that your statement audit solution provides real-time visibility into the audit’s progress – including targeted suppliers, the status of outreach and response, identified credits, etc. – guarantee that you have full transparency into the process and results.
Statement audits are much less intrusive because they involve supplier outreach and reconciliation and do not require on-site support from your team. Check that your statement audit provider can perform its work off-site, and has an easy way for your team to review results and verifications that require ongoing effort to support.
In addition to finding dollars, ongoing statement audits also uncover process errors before they become significant issues. Certify that your statement audit solution supports the best practice of rolling statement audits.
Statement Audits: Untapped Source of Dollars for Your Company Page 7
Automated, comprehensive, and continuous statement audits drive dollars to the bottom line by maximizing vendor recoveries across the breadth of a company’s suppliers and spend, which is a key difference from the traditional statement audit methodology. These differences deliver the following benefits:
Traditional AP audits overlook a significant recovery opportunity. Technology and automation have enabled statement audits that can reach out to the breadth of a company’s supplier population to request and analyze AR data, resulting in significantly higher statement claims than the traditional approaches. AP professionals from major companies across all industries are discovering that statement audits not only find more dollars for their company on an ongoing basis, but they are also far less intrusive on their organization. An ongoing, comprehensive statement audit is now considered a best practice for AP.
In addition, companies are realizing that traditional recovery audits and statement audits are ideal complements that together, perform a full review of both AP data the AR records of a company’s suppliers. Executed successfully, these combined audits will result in nearly doubling the recovery dollars for a company.
If your company is looking at a new recovery auditing initiative, if you aren’t seeing the results from your current recovery audit provider, or if you simply want to tap into the additional pool of credits in your supplier base, you owe it to your company to look at a comprehensive statement audit as part of the process.