Recovery Audit: What You Should Know

Reviewed by Ben Evans, CPA, CCA, and President of Auditec Solutions.

Our organization’s Accounts Payable team has best-in-class processes and controls. How could there be any payment-related errors?

Even those Accounts Payable teams with industry-leading processes and controls make payment errors. Often, these errors are the result of events such as turnover within the team and ERP changes and implementations. Since the onset of the Covid-19 Pandemic, we have also noted an increase in payment errors – possibly the result of Accounts Payable teams becoming decentralized due to remote and hybrid work environments.

Key Benefits of Recovery Auditing

Key benefits of recovery auditing include, but may not be limited to:

1. Increased cost savings: Recovery audits identify overpayments, duplicate payments, and other financial errors. This results in direct cost savings and improved bottom-line results for the organization.
2. Improved financial processes: Audits provide insight to what issues are driving the errors. This allows leadership to determine whether and what process and procedure changes should be made to mitigate the risk of the error occurring in the future.
3. Increased cash flow: Recovering all funds due to an organization improves its cash flow. This is particularly beneficial for small and mid-sized companies.
4. Enhanced vendor relations: Account reconciliations performed during recovery audits often clarify unresolved past discrepancies leading to improved vendor relations.
5. Improved data quality:A review of financial transactions and records can highlight data quality issues. This gives the organization the opportunity to make the necessary corrections to ensure improved data quality going forward.
6. Mitigated fraud risk: Recovery audits can help identify fraudulent activity such as “phantom” vendor schemes and collusion with suppliers.

Overall, recovery audits can provide significant benefits for companies looking to improve financial performance, identify opportunities to enhance internal processes, build their relationships with current vendors, ensure data integrity, and mitigate the risk of fraud.

What Types of Errors does a Recovery Audit Typically Identify?

Common errors typically identified through a recovery audit include, but are not limited to:

1. Duplicate payments: Instances where a vendor has been paid twice for the same goods or services delivered
2. Overpayments: Situations where a vendor has been overpaid due to a calculation or pricing error
3. Payment to inactive vendors: Instances where payments have been made to vendors who were not doing business with the company at the time of payment or are “phantom” vendors.
4. Pricing discrepancies: Circumstances where a vendor has charged a price in excess of the agreed-upon contract price.
5. Unclaimed credits: Situations where credits or discounts due the organization have gone undetected.
6. Sales tax errors: Instances where a company has over/underpaid sales tax

Recovery audits can help uncover a wide range of errors and discrepancies leading to improved financial results for the organization.

What Types of Businesses Benefit from Recovery Auditing?

Recovery audits are beneficial for a wide range of businesses across various industries. Any company which makes payments to vendors is a potential candidate for this type of audit. Industries commonly benefitting from recovery audits include, but are not limited to:

1. Retail and consumer goods: Retailers and consumer goods companies generally partner with large numbers of vendors resulting in an increased risk of overpayments and duplicate payments
2. Healthcare: These organizations have complex invoicing and payment systems which can result in a variety of errors
3. Manufacturing: Manufacturers typically have complex supply chains and work with many vendors leading to an increased risk of overpayments and pricing discrepancies
4. Financial Services: Organizations in this industry often work with many vendors for a variety of services such as IT, marketing, and legal
5. Government agencies: Government agencies often have complex procurement processes and partner with many vendors. This increases the risk of overpayments and duplicate payments

Any organization which makes payments to vendors can benefit from recovery auditing, regardless of industry or size.

How often should a Recovery Audit be performed?

This depends on the complexity of a company’s payment process and its total payment volume. Generally, it is recommended companies conduct recovery audits regularly, such as annually or bi-annually. However, some organizations choose to conduct recovery audits more frequently, such as quarterly or monthly, depending on their specific needs.

When considering how frequently to perform recovery audits, it is important to be mindful that the audit can be time-consuming and resource intensive. Therefore, companies should weigh the potential benefits against the costs when determining the appropriate frequency.

Organizations may also want to consider conducting a recovery audit following a significant change in their payment processes or systems to ensure any new processes are functioning as intended and are not resulting in payment errors. Often times, key process and/or system changes occur following mergers or acquisitions, but they also are associated with ERP implementations or changes to an organization’s procure-to-pay process.

What are the types of Recovery Audits?

There are different types of recovery audits, depending on the focus and scope of the review. Common types of recovery audits include:

1. Accounts Payable recovery audit: Focuses on reviewing a company’s accounts payable transactions to identify overpayments, duplicate payments, outstanding credits, pricing errors, etc.
2. Contract compliance audit: Emphasis on reviewing vendor contracts to ensure the vendor is complying with the terms and conditions of the contract (i.e., pricing, discounts, rebate programs, etc.)
3. Sales and use tax recovery audit: Includes a review of an organization’s sales and use tax payments to ensure accuracy and compliance with applicable tax regulations
4. Unclaimed property recovery audit: Focuses on reviewing unclaimed property records to identify any unclaimed funds the company may be entitled to, such as uncashed checks or unclaimed rebates
5. Healthcare recovery audit: Includes a review of a healthcare provider’s billing and payment processes to identify overpayments, coding errors, or other billing errors.

What Steps are Involved in a Recovery Audit?

Performing a recovery audit involves several steps listed below:

1. Identify the scope: The scope set by the organization will depend on its specific needs and objectives of the audit. This generally involves identifying the payment processes, systems, and vendors to be included in the review
2. Collect data: The data required to complete the review may include payment records, vendor contracts, invoices, etc.
3. Analyze the data: Once collected, the data is analyzed to identify any errors, discrepancies, overpayments, outstanding credits, etc. This may involve data analysis tools and techniques to identify patterns and trends in the data
4. Report findings: The results of the audit are reported to the organization’s management team highlighting any errors or discrepancies identified and providing recommendations for improving payment processes
5. Recover lost funds: After the findings are reported, the recovery audit team generally partners with the company to recover any lost funds identified through the review
6. Implement go-forward improvements: The organization may benefit from implementing improvements to its payment processes to mitigate the risk of future errors or overpayments. This may involve updating policies and procedures, implementing new systems or tools, or providing additional training to employees

Performing a recovery audit requires expertise in financial analysis and payment processes, so many organizations elect to partner with a third-party recovery audit firm to conduct the review. These firms have specialized knowledge and tools to identify errors and recover lost funds, ultimately helping companies improve financial performance and reduce the risk of future errors.

Recovery Audit Cost

The cost of a recovery audit can vary depending on several factors, including the size of the company, the complexity of the payment processes, and the scope of the audit. Generally, recovery audit firms work on a contingency basis, meaning that they only get paid a percentage of the recovered funds. This can range from 10% to 50% or more, depending on the specific agreement with the recovery audit firm. Some recovery audit firms also offer fixed-fee or hourly-rate pricing models, which may be more suitable for smaller or less complex audits.

How to choose a Recovery Audit Partner

There are many third-party recovery audit firms. When selecting a partner to perform a recovery audit, it is recommended to consider the following:

Vendor relationships: Your relationship with your vendors is critical to the current and future success of your organization. Therefore, it is important to select a third-party audit provider who carries out the audit responsibilities with a keen focus on professionalism and ensuring the relationship between your company and the vendor remain top priority.

Diverse professional background: It is important to use a third-party audit firm whose auditors come from a variety of backgrounds. This includes auditors with extensive experience in the recovery audit industry as well as those who have previous employment history with companies who used third-party audit firms. Having this variety results in an audit firm with the appropriate balance of recovery audit background and a full appreciation for the “white glove” treatment required to be provided to the organization and its vendors.

What are your needs? Some third-party audit firms specialize in a limited number of recovery audit types (i.e., sales and use tax, healthcare, contract compliance, etc.). Therefore, it is beneficial to consider the type of audit(s) your organization is looking to perform. This will increase the likelihood of efficiently selecting the audit firm which best suits your needs.