The following is a contributed article from Mark Irwin, vice president of audit operations at PRGX. Opinions expressed are author's own.
Overpayments in the source-to-pay (S2P) cycle are almost inevitable in large organizations with a high volume of invoices. That's why CFOs are increasingly adding recovery audits to the process. While they may have once been seen as witch hunts, today the audits are considered a natural fit for a healthy S2P cycle.
Technology is helping to fuel the trend. Big data is improving procurement and accounts-payable efficiency, making recovery audits better able to root out and rectify errors — and to do so sensitively.
Growing invoice volume
Payment accuracy is particularly hard to manage. Accounts payable teams face a growing volume of invoices each year, creating significant scope for overpayments caused by unrecognized rebates, duplicate invoices and other common mistakes.
More than half are down to simple human error: typos, lack of time, inaccurate calculations of taxes, discounts or rebates. In other cases, erroneous payments point to a lack of controls that might otherwise catch mistakes when invoices arrive.
Taken together, invoicing errors chip away at expected margins, and eventually turn into large losses.
Recovery audits are a tool for recouping the losses by identifying and recapturing the funds lost due to errors. By conducting a systematic review of vendor payments and comparing them against contracts, purchase orders, invoices, and receipts, errors can be fixed.
To maximize recoveries, flexibility in the audit engagement is vital. One business might be ready to dive straight in and do a full recovery audit of the entire organization. Another might start with one business unit and then incrementally expand the scope.
Regardless of the approach, following some core steps can set the stage for recovery audit success:
- Secure sponsorship. Having a senior internal sponsor for a recovery program is critical. Any recovery audit firm must deliver on its promises. But having an internal champion can help by identifying where the auditor can help the most and making it easier to expand the scope of analysis, covering multiple geographies, and moving from one division to the next.
- See the bigger picture. A collaborative relationship makes it easier to identify sensitivities in supplier relationships. The company might be happy to let some claims go if the supplier is providing critical products like medical supplies and equipment. In other cases, the supplier relationship might be seen as strategic and essential to the company's future plans, making controls and process improvements more critical than retrospective claims.
- Approach every claim with sensitivity. Recovery audits eventually mean contacting a supplier and asking for money back — a conversation which, while a best practice, is never welcomed. It's essential to keep the business relationship in mind and take the time necessary to secure the supplier's buy-in. Provide all the information and back-up they need to justify cutting the check. It's also vital to pick your battles. If you find evidence that could bring a claim into question, be proactive.
- Engage and be visible. While working patiently with suppliers is essential, it might also be necessary to engage with them more intensively — mainly when the objective is to tighten controls to stop errors from occurring. If the audit partner is perceived as a faceless entity in a distant office just asking for money, suppliers might drag their heels. Holding workshops with suppliers, or, in a large company setting, addressing them as a group in a summit type event, can ensure they understand the full context and objectives of an audit – and build respect for your role as the provider.
- Use technology as an aid, not a solution. New audit approaches using artificial intelligence and machine learning can help detect vital information like signatures and product codes across multiple document formats, which can help make recovery audits more efficient and accelerate recoveries. On their own, however, technology solutions can't deliver the nuance, discretion, experience and professionalism needed to manage supplier relationships or identify opportunities to make processes better.
- Match your audit partner to the size of your business. Because of their size, numerous business units, legal entities, and geographic footprint, global companies face extensive accounts payable challenges and a longer list of potential areas for improvement. A small recovery audit partner may not be able to bring insights from audit projects undertaken around the world or have the ability to scale when companies decide to extend audits outward from one business unit or country.