Profit Recovery Audit Introduction
What is a Profit Recovery Audit?
A profit recovery audit firm will do 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 recovery of any invalid payments.
The volume and complexity of most of today’s transactions make this kind of analysis 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, and in a perfect world, they would appear to be enough. However, too many accounts payable problems can be attributed to human error and individual interpretation, and these can frequently supersede even the best of systems. Also, as business becomes more and more competitive and demanding, a company’s exposure to these types of 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 tools and technologies 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 reviews and usually rely on their standard audit procedures to reveal such problems. This may leave many of the problems unaddressed and unsolved for long periods of time. Trying to recover a duplicate payment from a valued vendor a year or more after it happened will not be good for the relationship. Add to that the complication that so often occurs when companies merge or are bought out.
Who needs a Profit Recovery Firm
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, improper or incorrect disbursements.
Recovery audit firms offer a broad range of options that a company can choose from. The services the company subscribes to can be limited to an initial review where lost funds are discovered and reported by the audit firm, but the hiring company conducts the recovery of funds. Some companies may choose to use the services of the recovery audit firm all the way to full recovery of the funds by contacting vendors, etc. and ultimately modification of the company’s accounts payable systems to address underlying issues.
Recovery Audit History
The retail industry was the birthplace of 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 recovery audit firms realized that there’s a great potential for dollar recovery 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 transactions 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 companies.