Common accounts payable errors—such as overpayments, duplicate payments, pricing mistakes, inaccurately calculated taxes, and currency conversion errors—can lead companies to lose millions of dollars.
Other AP glitches leading to lost dollars include missed discounts as a result of late payments and vendor fraud. To avoid (or regain) potentially huge losses, AP departments may choose to periodically undergo a payment recovery audit.
Recovery audit providers identify and correct purchase-to-pay transactions up to six years retroactively. Organizations that undergo these audits recover capital and get unique insights to improve their transaction processes.
Case in Point
A community healthcare system serving nearly 230,000 residents across a 15-county region recently underwent a payment recovery audit. The organization's AP manager chose to have an audit done in order to see how the department was performing and determine if there was anything they were missing in their payment process.
The healthcare system hired an outside audit recovery provider to audit accounts payable. The provider searched for credits that AP might not have known they had and looked for any overpayments that AP may have made. The auditors went over three years’ worth of accounts payable transactions.
Steps for Success
The AP manager and the accounts payable accountant were the only people at the organization who were involved with the audit, besides the auditors. Here are the four steps they were asked to follow—steps that are customary in a recovery audit and can be expected by other AP practitioners conducting a recovery audit:
- Prepare the files and records. AP ensured that all the files for the previous three years’ worth of accounts payable records were available for the auditors to evaluate. AP also provided a list of all of the organization's vendors, along with their contact information.
- Cover the legal bases. AP was required to provide a release to the vendors to sign that would allow AP to give statement information to the audit recovery company.
- Be available for on-site visits. The auditor came on location three times for about a week each time. AP was asked to be available when the auditor was on site to assist the auditor when needed.
- Communicate regularly. The auditor and AP corresponded via phone and e-mail about any findings the auditor made during the site visits. AP verified any credits or overpayments the auditor found to ensure that there was, in fact, a problem.
The payment recovery audit took about six months from beginning to end. The recovery audit did not require extensive preparation on AP's part. AP simply needed to make sure all filings were up to date and to be on hand for any help the auditor needed throughout the process.
Advice for Other AP Professionals
In the case of this organization, the benefits of the payment recovery audit fully justified the effort. The main investment for AP was time. Since auditors customarily work on a contingency basis and are paid a percentage of what they actually recover, cost was not an issue.
Often, it takes an audit to bring to light issues with processes and procedures that can allow AP to recoup missing credits or overpayments. Not all vendors let AP know if a credit is on record that has not been taken—or if you made an overpayment. Similarly, not all vendors send out statements unless you request them. A recovery audit identifies these issues and also enables AP to learn from any mistakes that may have been made—during times of change or departmental turnover, for example.
Cooperate and Work with the Auditors
In any auditing scenario in which issues and errors may be identified, it is easy to become defensive. The important thing to remember is that recovery auditors are there to help AP find money that belongs to your organization. Work with them and learn from them. They are not there to point fingers. They are there to help AP recover revenue and help improve your processes.