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What is Recovery Auditing?


recovery audit - also commonly referred to as payment recovery, profit recovery, or accounts payable audit - is the process of reviewing an enterprises' financial transactions, as well as the related data and operations to identify and recover various forms of erroneous payments, over deductions, and under deductions to suppliers.

What is the purpose of Recovery Auditing?


Purpose #1 - ensure payment accuracy and eliminate financial leakage.

The recovery audit process helps prevent enterprises from losing millions, even billions, of dollars every year due to financial errors, like:
  • Unpaid invoices,
  • Duplicate payments,
  • Pricing errors,
  • Billing errors,
  • Discounts and allowances not received, and
  • Overpayments.

Purpose #2 - To identify areas of opportunity to elevate operational efficacy and efficiency within the company or enterprise.

Along with uncovering monetary discrepancies, the recovery audits can will also serve as a way to uncover areas of opportunity to improve operational or financial processes.  reveal errors with the financial process as a whole. Another benefit of recovery audits is the potential improvements to sourcing, procurement, and supplier relationship management.

Key Benefits of a Recovery Audit


Benefit #1 - Recovery audits can dramatically improve your bottom line.
The most important benefit of recovery audits is that it increases cash flow and pure profits through the identification revenue leakage.

Benefit #2 - Recovery audits can contribute to operational efficiency.
By identifying operational gaps and areas of financial leakage, recovery audits offer a unique opportunity to remedy these issues and make a company’s internal processes more efficient and proactive.

Benefit #3 - Recovery audits can potentially identify and address issues with third-parties and suppliers.
By acting as a check that ensures accuracy on all parties, recovery audits offer a route for a company to address issues or disconnects with suppliers and ensure contract compliance. This proactive approach to third-party communication prevents issues that could potentially harm the working relationship down the road. 

Benefit #4 - Recovery audits can mitigate the risk of fraud.
By investigating deep into a business’s financials, the recovery audit process uncovers mistakes, performs a root cause analysis, corrects the error, and prevents the issue from happening again. As a result of this enhanced oversight, recovery audits effectively close the window of opportunity for financial fraud.

Benefit #5 - Prevent future leakage and errors.
The ongoing benefit of recovery auditing is that the process finds all the gaps in your financial processes. Identifying internal mistakes such as payment issues, contract noncompliance, or incorrect information, can help businesses correct the mistakes and take action to prevent future mistakes.

Errors that Recovery Audits Typically Uncover

  • Duplicate payments to suppliers and vendors
  • Unsent invoices
  • Unclear payment timeframes
  • Incorrect data entries
  • Unmonitored profitability (bottom-line)
  • Overlooked discounts
  • Sales and Use Tax over charges
  • Unissued rebates or incorrectly calculated
  • Uncredited Returns
  • Unprocessed Credits
  • Unnecessary Escheatment
  • Wrong supplier payments
  • Pricing errors
  • Missed allowances
  • POS allowances missed or calculated incorrectly
  • Markdown or Price Protection not taken

What types of businesses leverage Recovery Audits?


Although many outsourced recovery audit firms focus on select verticals or companies, any company that is looking for visibility into all of its financial and procurement processes would benefit from a recovery audit. Here are a few industries where many companies undergo recovery audits:

Retailers
This includes front-of-house merchandise for industries like Pharmaceuticals (i.e. Walgreens and CVS sell merchandise). Retailers often work with multiple recovery auditing firms, performing both primary and secondary recovery audits to maximize the revenue leakage captured.

Non-Retail Businesses who have a high volume of annual transactions
Also known as “Goods For Resale,” industries like Manufacturing will conduct a recovery audit.

Healthcare
By law, any healthcare provider has mandated periodic recovery audits.

Pharmaceutical Companies
Companies providing prescription drugs will undergo a Pharmacy Audit.

How often should Recovery Audits be performed?


How often your organization should undergo recovery audits depends on a number of factors. Routine recovery audits are recommended to be performed annually. If your organization is handling new processes / technology that are high-risk, it’s best practice to complete recovery audits quarterly or semi-annually, or whenever the following happens:

  • When your vendor management data isn’t 100% consistent or up-to-date
  • When your organization has disparate systems that do not integrate seamlessly
  • When your organization undergoes A/P or procurement team changes
  • When your organization undergoes a merger or acquisition
  • Any time you engage in an A/P system upgrade or overhaul

What are the types of Recovery Audits?

 

As a rule of thumb, the various types of recovery audits generally fall into one of three categories: Retail Recovery Audits, Non-Retail Recovery Audits, and Healthcare Recovery Audits.


Types of Retail Recovery:

  • Merchandise Audits, also known as Goods for Resale Audits, are specific to retailers. They help ensure that retailers and suppliers are compliant with agreements regarding product pricing and promotions. With merchandise audits, it’s not just about correcting erroneous payments; it’s also about vendor funding being calculated appropriately.
  • Accounts Payable (AP) Audits look into an organization's accounts payable records; essentially anything a firm spends money on.This includes duplicate payments, goods not for resale, goods for resale, and goods not for resale. detail into the organization’s entire spend. Unlike merchandise audits AP audits do a deep dive into all vendor statements - not just merchandise vendors, providing detail and context into the organization’s entire spend, claiming categories such as duplicate payments and statements and disclosures. Though all retailers undergo an AP audit, these audits are not limited to the retail industry.
  • Pharmacy Audits. Pharmacies, such as Walgreens and CVS, conduct merchandise specific audits that are referred to as “front-of-house.” Because these types of pharmacies sell everyday merchandise, they are considered a retailer and must undergo this specific kind of audit. The part of the business that handles prescription drugs has a different and distinct type of audit.
  • Freight Audits. Regarding freight, the two types of freight audits are Freight Rate Audit and Vendor Compliance Freight Audit. Freight Rate Audit provides organizations with data that identifies financial discrepancies and insight to improve operations. Similar to contract compliance, Vendor Compliance Freight Audit analyzes agreements to ensure supplier shipping compliance.

         Related reading: 4 Common Freight Invoice Errors that Cause Overpayments


Types of Non-Retail Recovery Audits

  • Manufacturer Audits. Considered as Goods-for-Resale, manufacturer audits supplement regular quality control efforts. This audit provides process improvements by analyzing procedures, identifying inaccuracies, and ensuring that the manufacturer is performing at peak efficiency. Along with a manufacturer audit, the organization will also conduct AP audits and freight audits.
  • Commercial Audits (or Non-Retail Audits). Non-retailers are referred to as “commercial accounts” in the recovery auditing landscape, making this industry’s specific recovery audit referred to as “Commercial Audits.” Because these organizations do not sell or resell merchandise, a Commercial Audit will not include any merchandise audits. Instead, organizations will undergo Accounts Payable (AP) Audits that cover duplicate payments (aka dupes), discounts, and statements.
  • Healthcare Recovery Audits. Created and enforced by Medicare, healthcare audits serve to identify and correct Medicare payment inaccuracies. Also known as Healthcare Payment Integrity Audits, healthcare recovery audits are often conducted by healthcare payers - such as Medicare, Medicaid, and private health insurance companies like Blue Cross Blue Shield - as a check on healthcare providers like hospitals and medical offices. Ever since Medicare and the Patient Protection & Affordable Care Act (ACA) were passed, the government mandates that recovery audits are conducted on a regular basis. In this space the average recoveries identified is far more than what is typically found in the retail space. The average recovery for a retail recovery audit is about 1/10th of one percent of their spend, whereas the average recovery for a healthcare recovery audit is about 4-5% of total spend.

What are the types of Recovery Auditing Functions?

 

In addition to standard recovery audits that uncover monetary discrepancies, companies will also undergo two supplier-related audits: Contract Compliance Audits and Freight Audits.


Contract Compliance Audits 
are performed to review a company’s contractual agreements with suppliers and vendors to ensure terms of the contract are being enforced. These audits can be conducted around both goods for resale or goods not for resale, and at both the vendor level and the category level. Generally speaking, contract compliance audits can be performed around any process that is dictated by specific contract terms. Contract compliance audits offer both insight and clarity into negotiations, provide validation if suppliers and vendors are applying the most favorable pricing terms, and ensure that all transactions are being monitored adequately. Without proper contract management, businesses typically lose up to 40% of a contract’s value [Source: KPMG].
Check out our eBook to learn more about how you can go beyond identifying contract compliance mistakes and actually prevent them.

Freight Audits
help companies review discrepancies in freight invoicing and billing,helping organizations optimize the supplier/freight relationship for efficiency and accuracy. These audits typically review shipper inaccuracies, per diem and driver detention errors, accessorial charges, and overlooked discounted rates.
Read more about how you can avoid unexpected freight expenses in our blog: 4 Common Freight Invoice Errors that Cause Overpayments


The recovery audit process is complex and oftentimes require more than just the audit...


Types of Recovery Audit Services for Retailers:

  • Post Audit Services are performed by the Primary Post Audit Firm and the Secondary Post Audit Firm who continue the recovery audit process with accelerated audits.
  • Internal Recovery Audit Services are conducted by a retailer’s Internal Recovery Audit Team. Only a limited number of retailers have their own Internal Audit Recovery Team which includes the top #30 retailers in the world. Because these organizations typically do not have a niche in recovery auditing, they rely on and can be augmented by third-party audit tools and on-demand audit staff (like FlexTecs). Organizations often choose this solution because they are equipped with the tools to succeed and enabled to do the work themselves.
  • Recovery Prevention Programs focus on fixing potential errors before payment or before the initial deduction. While most of recovery auditing is about post transaction recovery, Recovery Prevention is a crucial process in preventing errors.



Types of Recovery Audit Services for Non-Retailers (AP Audits):

  • Post Audit Services involve the primary audit firm and are performed by an outsourced recovery audit partner.
  • Internal Recovery Audit Services are aided by third-party recovery audit tools and on-demand staff. Because non-retailers do not have a dedicated internal recovery audit team, requiring outside help is a must.
  • Recovery Prevention Programs focus on fixing potential errors before payment or before the initial deduction. While most of recovery auditing is about post transaction recovery, Recovery Prevention is a crucial process in preventing errors.

How to perform a Recovery Audit assessment

 

How can I prepare for an external Recovery Audit?

Perhaps the most important part of an external recovery audit is to ensure that external recovery auditors have access to everything they need in order to maximize recoveries. This is when an organization examines all financial documents and processes to ensure that all of the information is correct before undergoing an official audit with an external firm. Broken down are four steps you can take to prepare for a recovery audit:

  1. Complete research to understand which type of recovery audit your organization will require. Having a mutual understanding of the scope of work will allow your auditor to work more efficiently and subsequently save both parties more time.
  2. Identify subject matter experts (SMEs) within the organization + provide sufficient resources and allocated time for each SMEs to focus on the initiative. Departments in your company such as procurement, finance and accounting, and operations have significant insight that will influence the recovery audit process. By connecting with these departmental SMEs, you will have a better understanding of what should be prioritized for preparation. Because SMEs will need to refocus their efforts for preparation, it’s best to provide them with everything they need.
  3. Examine your internal processes and documents. Based on the standards and regulations recovery auditors will be looking for, you should proactively identify any gaps between your processes and/or documents and communicate these issues with your external recovery auditing partner.
  4. Gather all documentation. Having a list of supporting resources such as policy statements, process materials, and financial records ready for your auditors will help everything go smoothly from the start.

 

What are the steps of a Recovery Audit Process?

The steps of a recovery audit process can be broken down into five phases:

  1. Development: This phase is to develop the recovery audit objectives / scope of work.
  2. Planning: This phase is to define the scope to set the expectations of work and align the team. Preparation and the gathering of all information such as documents and other necessary resources are completed as well.
  3. Execution: Throughout this phase, the auditor will conduct regular update meetings with the client to discuss recommendations based on their discoveries. The goal is to have an understanding of what’s going on and what’s next. 
  4. Reporting: In this phase, auditors will present a summary report of final audit discoveries, conclusions, and recommendations. 
  5. Follow-Up / Post-Audit Process: After the initial recovery audit has taken place, auditors will follow-up with the client for ongoing support throughout the engagement.



How long does a Recovery Audit take?

It can typically take on average three months to complete but the period it takes to complete a recovery audit is dependent on multiple factors, including:

  • The size of the company or enterprise
  • The external recovery auditing firm’s process and technology
  • The delivery model chosen (i.e. Accelerated recovery audit vs. real-time recovery audit vs. post-audit recovery services)

 

Accelerated + Real-Time Recovery Audits - An approach crucial to all audits is an accelerated audit completed in real-time - meaning the audit schedule is happening as transactions come through or within days of the transactions (pre- or post-payment). This helps business capture the mistake before it happens or correct it as soon as it does happen, minimizing the chances of errors going unnoticed.

Recovery Audit Costs

 

How much does a recovery audit cost?

Typically, recovery auditing firms price their services on a contingency basis.  Some recovery auditors charge a fee plus commission based on how much they recover and some auditors opt for pure commission anywhere between 10% to 40% of findings.

What is contingency-based recovery auditing? 

In short, contingency-based recovery auditing means that the fee you pay recovery auditing firms is a percentage of the revenue recovered. Therefore, if your recovery auditing firm recovers nothing, your organization will pay nothing. For example, if an external recovery auditing firm finds $1 million in recoveries and charges on a contingency basis of 17%, the organization will pay the external firm $170,000.

How to choose a Recovery Auditing Partner


What Should I Consider When Choosing A Recovery Auditing Partner?

The process of choosing the right auditor for your organizational or individual needs is dependent on a couple of things. So, let’s start by asking yourself these eight questions:

  • RA Qualifications - Is the auditor qualified? Are they certified to conduct a recovery audit? 
  • RA Experience - Does the auditor have extensive industry experience?
  • RA Reputation - What is the auditor’s reputation? Do they have proof points of successful work?
  • RA Technology - What technology does the auditor use?
  • RA Values - Is the auditor committed to providing quality assurance? Are their values aligned with yours?
  • RA Pricing - Is the budget reasonable? 
  • RA Process + Approach - What does the auditor’s recovery auditing process look like? Will there be ongoing support post-audit?

Recovery Audit Conclusion + Resources and Quick Links


Conclusion

For organizations looking to grow and expand into more revenue driving, strategic roles, conducting a recovery audit is an essential tool to both save money and identify gaps going forward. Although improving your bottom line will always be the ultimate goal of a recovery audit, they also offer an understanding of where gaps exist within your financial processes and provide incredible insight on how to mitigate the risk of financial leakage. To sum it all up, the value of a recovery audit extends beyond what is recovered. The insights alone will transform your organization, eliminate operational gaps., and protect your bottom line.

Resources and Quick Links

At FlexTecs, our clients turn to us for our flexible, collaborative, no strings attached approach to profit recovery. We combine cutting-edge, efficient, and secure technology tools with a client-first, proactive mentality: eliminating leakage, laying the groundwork for prevention, and identifying errors as close to the original transaction as possible, including before invoices are paid. Based on your interest in recovery audits, our team has gathered a few additional resources that you might find useful:

 

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