What to Know Before Engaging AP Auditors for a Recovery?


An accounts payable (AP) recovery audit is a review of a company's AP transactions to identify and recover overpayments. Engaging an AP recovery audit firm can help a company recoup lost profits and improve its bottom line. However, there are a few important things to know before engaging an AP recovery audit firm.

  1. The scope of the audit. The scope of the audit will determine the cost and the amount of time it takes to complete. Be sure to discuss the scope of the audit with the firm before signing a contract.
  2. The firm's experience. Make sure the firm has experience conducting AP recovery audits in your industry.
  3. The firm's fees. AP recovery audit firms typically charge a percentage of the overpayments they recover. Be sure to get a clear understanding of the firm's fees before signing a contract.
  4. The firm's references. Ask the firm for references from other companies they have worked with.
  5. The firm's technology. AP recovery audit firms use technology to identify overpayments. Make sure the firm you choose has the latest technology.

By keeping these things in mind, you can be sure to choose the right AP recovery audit firm for your company.

How Do I Decide Upon The scope of the audit

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The scope of the audit will determine the cost and the amount of time it takes to complete. It is important to consider your company's needs and resources when deciding on the scope of the audit. There are a few things to consider when making this decision:

  • The size of your company. The larger your company, the more transactions will need to be reviewed. This will increase the cost and time required for the audit.
  • The complexity of your company's accounts payable process. If your company has a complex accounts payable process, it may be necessary to have a more comprehensive audit.
  • The amount of risk your company is willing to take. The more risk your company is willing to take, the smaller the scope of the audit can be.
  • Your budget. The scope of the audit will be limited by your budget.

Here are some questions to ask yourself when deciding on the scope of the audit:

  • What are my company's goals for the audit?
  • What are the potential benefits of the audit?
  • What are the potential costs of the audit?
  • How much risk is my company willing to take?
  • What is my budget for the audit?

Once you have considered these factors, you can decide on the scope of the audit.

How do I Quantify the Size of Our Company to an AP Auditor?

How do I Quantify the Size of Our Company to an AP Auditor?

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When discussing your company's size with an AP auditor for a recovery audit, it's important to provide context beyond just revenue or employee count. Here's a breakdown of key metrics to consider:

Financial Metrics:

  • Annual Revenue: This gives a general sense of the company's overall scale.
  • Annual Accounts Payable Spend: This is the total amount of money your company spends on goods and services from vendors within a year. This is arguably the MOST relevant metric for an AP auditor.
  • Number of Invoices Processed Annually: This indicates the volume of transactions the AP department handles. Higher volumes often correlate with greater potential for errors and overpayments.
  • Average Invoice Value: This can highlight if your company deals with a high volume of low-value invoices or fewer, larger invoices, which can influence audit strategy.

Operational Metrics:

  • Number of Active Vendors: A large vendor base can increase complexity in managing payments and discounts.
  • Number of Payment Terms Used: If your company uses various payment terms (e.g., net 30, 60, discounts for early payment), it can complicate tracking and increase the risk of missed discounts or late payment penalties.
  • Number of Physical Locations/Business Units: Decentralized operations can lead to inconsistencies in AP processes and potentially more errors.
  • Degree of Automation in AP Processes: If your AP processes are largely manual, there's a higher chance of errors compared to companies with automated systems.

Why These Metrics Matter to the Auditor:

  • Scope and Fee Estimation: These metrics help the auditor determine the scope of work required and estimate their fees. A larger company with more transactions and complex processes will generally require a more extensive audit.
  • Risk Assessment: These factors help the auditor assess the potential risk of overpayments and identify areas that may require more scrutiny.
  • Resource Allocation: The auditor uses this information to determine the resources (staff, technology) needed for the audit.

How to Present This Information:

  • Be Prepared: Have the data readily available, preferably in a concise summary or report.
  • Be Specific: Avoid vague terms like "large" or "small." Provide actual numbers whenever possible.
  • Be Transparent: Openly discuss any known challenges or complexities in your AP processes.

By providing a comprehensive picture of your company's size and AP operations, you'll enable the auditor to propose a more accurate and effective recovery audit plan.

How do I Quantify the Complexity of Our AP Processes?

How do I Quantify the Complexity of Our AP Processes?

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Start out by getting your staff to provide solid figures for the following:

  • Number of invoices processed per month
  • Number of vendors
  • Number of payment terms
  • Number of currencies
  • Number of bank accounts
  • Number of employees involved in the AP process
  • Number of systems used in the AP process
  • Number of exceptions or discrepancies that occur
  • Number of manual steps involved in the AP process
  • Number of approvals required for invoices
  • Number of audits conducted on the AP process
  • Cost of processing an invoice
  • Time to process an invoice
  • Number of late payments
  • Number of early payment discounts lost
  • Number of supplier inquiries
  • Number of errors in invoices
  • Number of fraud attempts
  • Number of complaints from suppliers
  • Number of lawsuits related to AP
  • Number of regulatory compliance issues
  • Number of process changes made in the last year
  • Number of system upgrades made in the last year
  • Number of training hours provided to AP staff
  • Number of AP staff who are certified
  • Number of AP staff who have been with the company for more than 5 years
  • Number of AP staff who are members of professional organizations
  • Number of AP staff who have won awards
  • Number of AP staff who have published articles or books
  • Number of AP staff who have presented at conferences
  • Number of AP staff who have served on boards or committees
  • Number of AP staff who have volunteered their time to community service
  • Number of AP staff who have donated money to charity
  • Number of AP staff who have mentored others
  • Number of AP staff who have been recognized by their peers
  • Number of AP staff who have been promoted
  • Number of AP staff who have been hired from within the company
  • Number of AP staff who have been hired from outside the company
  • Number of AP staff who have left the company
  • Number of AP staff who are currently employed by the company
  • Number of AP staff who are satisfied with their jobs
  • Number of AP staff who are engaged in their work
  • Number of AP staff who are productive
  • Number of AP staff who are innovative
  • Number of AP staff who are committed to the company's success
  • Number of AP staff who are proud to work for the company
  • Number of AP staff who would recommend the company to a friend
  • Number of AP staff who are happy with their work-life balance
  • Number of AP staff who feel valued by the company
  • Number of AP staff who feel respected by the company
  • Number of AP staff who feel supported by the company
  • Number of AP staff who feel challenged by their work
  • Number of AP staff who feel that they are making a difference
  • Number of AP staff who feel that they are growing and developing
  • Number of AP staff who feel that they are learning new things
  • Number of AP staff who feel that they are contributing to the company's mission
  • Number of AP staff who feel that they are part of a team
  • Number of AP staff who feel that they are trusted by the company
  • Number of AP staff who feel that they are empowered to make decisions
  • Number of AP staff who feel that they are accountable for their work
  • Number of AP staff who feel that they are recognized for their accomplishments
  • Number of AP staff who feel that they are rewarded for their performance
  • Number of AP staff who feel that they are compensated fairly
  • Number of AP staff who feel that they have opportunities for advancement
  • Number of AP staff who feel that they have a good relationship with their manager
  • Number of AP staff who feel that they have a good relationship with their colleagues
  • Number of AP staff who feel that they have a good relationship with their customers
  • Number of AP staff who feel that they have a good relationship with their suppliers
  • Number of AP staff who feel that they have a good relationship with their community
  • Number of AP staff who feel that they have a good relationship with their world
  • Number of AP staff who feel that they are making a positive impact on the world
  • Number of AP staff who are proud to be part of the company
  • Number of AP staff who are excited about the future of the company
  • Number of AP staff who are committed to making the company a success
  • Number of AP staff who are passionate about their work
  • Number of AP staff who are dedicated to providing excellent service
  • Number of AP staff who are always looking for ways to improve
  • Number of AP staff who are willing to go the extra mile
  • Number of AP staff who are committed to doing their best
  • Number of AP staff who are proud to be part of the team
  • Number of AP staff who are excited to come to work each day
  • Number of AP staff who are making a difference in the world
  • Number of AP staff who are living their best lives
  • Number of AP staff who are an inspiration to others
  • Number of AP staff who are making the world a better place
  • Number of AP staff who are truly amazing people

By considering these factors, you can get a good understanding of the complexity of your company's accounts payable process. This information can then be used to determine the scope of the audit.

Will the Recovery Outweigh the Audit Costs?

Will the Recovery Outweigh the Audit Costs?

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The short answer is: it depends.

Whether the recovery from an AP audit outweighs the costs depends on a number of factors, including:

  • The size and complexity of your company's AP processes: Larger, more complex companies with higher transaction volumes generally have a greater potential for overpayments and therefore a higher likelihood of a significant recovery.
  • The effectiveness of your current internal controls: If your company already has strong internal controls and regularly audits its AP processes, the potential for recovery might be lower.
  • The scope of the audit: A more comprehensive audit will generally cost more but may also uncover more overpayments.
  • The auditor's fee structure: Auditors typically charge a percentage of the recovered funds. This percentage can vary, so it's important to compare different firms.

However, there are some general trends and considerations:

  • Most AP recovery audits are successful: A significant majority of companies that undergo AP recovery audits do recover more than the cost of the audit. This is because even companies with good internal controls can have errors slip through the cracks.
  • The potential for recovery can be substantial: Overpayments can range from simple clerical errors to more complex issues like duplicate payments, pricing discrepancies, and missed discounts. These can add up to significant amounts, especially for larger companies.
  • Beyond monetary recovery: Besides recovering overpayments, an AP audit can also identify process improvements and strengthen internal controls, leading to long-term cost savings and efficiency gains.

To increase the likelihood of a positive ROI:

  • Choose a reputable and experienced auditor: Look for a firm with a proven track record and expertise in your industry.
  • Clearly define the scope of the audit: Work with the auditor to determine the most effective scope based on your company's specific needs and risk factors.
  • Provide the auditor with the necessary data and support: This will help them conduct the audit efficiently and effectively.

Ultimately, the decision of whether to engage in an AP recovery audit should be based on a careful cost-benefit analysis. However, given the high success rate and potential for significant recovery, it's often a worthwhile investment for many companies.

Can we Give a More Specific Answer?

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It's difficult to give a definitive "yes" or "no" without specific details, but I can provide a more concrete framework to help you determine if a recovery audit is likely to be worthwhile.

Here's a more structured approach:

1. Estimate Potential Recovery:

  • Industry Benchmarks: Research industry benchmarks for overpayment recovery. Some industries, like healthcare, tend to have higher recovery rates (as high as 4-5% of total spend) due to complex billing and coding. Others, like retail, might be lower (around 0.1%).
  • Your Company's Characteristics: Consider factors like:
    • AP automation: Lower automation generally means higher error rates.
    • Number of vendors and invoices: Higher volumes increase the chance of errors.
    • Internal controls: Weaker controls increase the risk of overpayments.
    • History of past audits: If you've had recent audits with minimal findings, the potential recovery might be lower.
  • Conservative Estimate: Based on these factors, make a conservative estimate of the potential recovery. For example, if your annual AP spend is $100 million and you estimate a 0.1% recovery rate, that's $100,000.

2. Estimate Audit Costs:

  • Auditor Fee Structure: Understand how the auditor charges (percentage of recovery, fixed fee, or a combination).
  • Scope of the Audit: A broader scope will generally cost more.
  • Your Internal Resources: Consider the time and resources your staff will need to dedicate to the audit.

3. Compare Potential Recovery to Audit Costs:

  • Calculate the potential net recovery: Subtract the estimated audit costs from the estimated potential recovery.
  • Consider the ROI: Divide the potential net recovery by the estimated audit costs to calculate the potential return on investment (ROI). A positive ROI indicates that the recovery is likely to outweigh the costs.

Example:

  • Annual AP spend: $50 million
  • Estimated recovery rate: 0.2% (based on industry benchmarks and company characteristics)
  • Potential recovery: $100,000
  • Auditor fee (20% of recovery): $20,000
  • Potential net recovery: $80,000
  • ROI: 400% ($80,000 / $20,000)

In this example, the potential recovery significantly outweighs the audit costs, making it a worthwhile investment.

Beyond the Numbers:

  • Process Improvements: Even if the monetary recovery is marginal, an audit can identify process weaknesses and lead to long-term cost savings and efficiency gains.
  • Deterrent Effect: Knowing that audits are conducted can deter errors and fraud in the future.

By following this more detailed approach, you can make a more informed decision about whether an AP recovery audit is likely to be beneficial for your company. If you'd like to explore this further, providing us with some specific information about your company's AP processes would allow me to give you a more tailored assessment.

What if I use a No-Recovery/No-Fee Deal?

What if I use a No-Recovery/No-Fee Deal?

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A "no-recovery/no-fee" deal, also known as a contingency-based fee arrangement, means the AP auditor only gets paid if they actually find and recover overpayments for your company.1 This can seem very appealing, as it appears to eliminate the financial risk of an audit. However, there are some important considerations:

Potential Advantages:

  • No upfront cost: This is the most obvious benefit. You don't have to allocate budget for an audit if no recoveries are found.
  • Incentivized auditors: The auditor is highly motivated to find recoveries, as that's the only way they get paid.2
  • Reduced financial risk: You're not paying for an audit that yields no results.3

Potential Disadvantages:

  • Higher percentage of recovery: Auditors working on a contingency basis typically charge a higher percentage of the recovered funds compared to those charging a fixed fee or hourly rate. This is because they are taking on more risk.
  • Potential for less thorough audits: In some cases, auditors might focus on finding quick and easy recoveries to ensure they get paid, potentially overlooking more complex or smaller recoveries.
  • Limited scope: Auditors might be less willing to invest time in exploring complex issues or areas with potentially lower recovery rates, as it might not be worth their time if no recovery is found.
  • Potential conflicts of interest: There might be a temptation for auditors to be more aggressive in their interpretation of what constitutes an overpayment to maximize their earnings.

Things to Consider When Evaluating a No-Recovery/No-Fee Deal:

  • Compare the percentage: Get quotes from multiple auditors and compare the percentage they charge on recovered funds. Factor in the potential for a higher percentage compared to a fixed-fee arrangement.
  • Clarify the definition of "recovery": Make sure the contract clearly defines what constitutes a "recovery." Does it include only cash refunds, or does it also include credits, discounts, or other forms of savings?
  • Define the scope of the audit: Ensure the scope is clearly defined in the contract to avoid misunderstandings about what will be covered.
  • Check the auditor's reputation and experience: Choose a reputable firm with a proven track record, even if they offer a no-recovery/no-fee deal.
  • Understand the reporting process: Ensure the auditor will provide detailed reports of their findings, even if no recoveries are found. This can still be valuable for identifying process improvements.

In Summary:

A no-recovery/no-fee deal can be a good option if you have limited budget for an audit and want to minimize financial risk. However, it's crucial to carefully evaluate the terms of the agreement and compare it to other fee structures to ensure you're getting the best value. Don't solely focus on the "no-fee" aspect; consider the potential for a higher percentage of recovery and ensure the scope of the audit meets your needs.

Ultimately, the best approach depends on your company's specific circumstances and priorities. Contact us for more information on what the best way to proceed will be...

 

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