What is a Profit Recovery Audit?
A profit recovery audit is a process whereby a firm conducts a rigorous review of a company’s disbursements to find funds that may be due back to the enterprise because of duplicate payments, overpayments, or failure to take credits or other deductions. Each disbursement is examined against the supporting documentation to assure that the entire amount was valid and then, for a fee, will pursue the lost profits of any invalid payments.
The volume and complexity of most of today’s transactions make this kind of advanced analytics and profit recovery very valuable and for large companies, almost mandatory. Most accounts payable systems have built-in controls to prevent many of these problems of lost revenues, and in a perfect world, they would appear to be enough.
However, when you analyze the root cause analysis of an audit you find that too many accounts payable problems can be attributed to human error and individual interpretation, and these can frequently supersede even the best of software systems. The results of an audit like this are not trivial. It is not uncommon for a company with tens of thousands of suppliers to identify and recover multiple millions of dollars annually.
Common Claim Types
Vendor Statement Credits
Unapplied Cash Claims
Recovery Audit Frequency
As business becomes more and more competitive and demanding, a company’s exposure to these types of errors and losses becomes greater. Procurement staff intent on cost-cutting may be producing these more significant exposures by increasing volatility in pricing techniques and demanding more sourcing selections.
Profit Recovery Firms use specialized and highly automated software technology to perform complete reviews of all the financial transactions of a company. Most companies do not have the systems or staff to carry out such an audit and usually rely on their standard audit procedures to reveal such problems. This may leave many of the clients’ problems unaddressed and unsolved for long periods of time.
Trying to recover money from a valued vendor a year or more after there was a contract compliance issue might not be good for the relationship and could potentially cost you money in the long run. Add to that the complication that so often occurs when companies merge or are bought out.
Recovery Audit History
The retail industry was the birthplace of profit recovery auditing some 40 years ago, thanks to its complex structure heavily burden with the high volume of countless transactions. This was a “fruitful ground” for all kinds of transaction errors. Very soon, the profit recovery audit firms realized that there’s a great potential for millions of dollars annually associated with retail companies. Their auditor teams were reviewing retail AP, purchasing processes, and data, in order to achieve these goals.
As expected, the recovery auditing industry inevitably evolved. It had become pretty much obvious that these transaction errors weren’t the exclusivity of the retail industry. Any industry dealing with the high volume of both transaction data and suppliers is a potential client for providers of profit recovery auditing services. In addition, the successful recovery practice of auditor teams attracted the attention of manufacturing and other high-volume clients.
Check out Wikipedia for more information on the history of profit recovery auditing
Who needs a Profit Recovery Audit?
Any business that has a high volume of purchase transactions in an environment of rapidly changing prices, varying and complicated discounts and pricing schedules, or complex and multiple sales tax jurisdictions might consider using a profit recovery firm.
Also, any company that has recently changed accounting systems had a significant organizational change, or itself experienced a merger or acquisition should also consider such a step. Significant changes such as these can introduce variations in the accounts payable system that leads to increased risk of duplicate data, improper or incorrect disbursements
Recovery audit firms offer a broad range of audit practices that a company can choose from. The services a company subscribes to can be limited to an initial review where lost funds are discovered and reported by the audit firm or they may choose to use the services to fully recover the funds by contacting vendors, etc. Even to the point where the audit firm deploys their technology to make modifications to the clients’ accounts payable systems. The auditors may require some access to your business staff and files 0n-site but should be able to conduct their audit process off-site.
The services that each recovery audit firm offers will vary button most web site there exists a page that outlines the services they provide.Audit