Recovery audit software and services can turn mistakes into profit

23rd January 2012

Recovery audit used to be the preserve of very large organisations and specialist service providers, but technology developments, economic challenges, and evolutionary changes have pushed the industry into a period of accelerated development – which could be good news for cash-strapped businesses, as FSN writer Lesley Meall discovers.

Let’s start with the bad news: mistakes happen – even in organisations with strong internal controls. So each and every year, a great many businesses, charities, and public sector bodies will have overpaid suppliers, left credits or incentive rebates unclaimed, missed input VAT, or been adversely affected by all sorts of similar processing errors or oversights. The good news is: it may not be too late for some organisations to rectify the situation. With the help of recovery audit services or specialist recovery audit software, these little mistakes can be detected and transformed into large amounts of cash.

Quite how much this cash can swell your bottom line depends on a number of factors. ‘Volume is the driving force,’ says Peter Welch, managing director with Meridian Cost Benefit Management, a UK recovery audit specialist, so users of both recovery audit services and specialist software applications (on which more, later) tend to be medium to large organisations. At the top end of the market this translates into multinational users such as Lafarge (Cement) and Walmart (retail), but many smaller (if not small) organisations are also benefiting from recovery audit, and these include Edinburgh City Council, Kuoni Travel, and Wyevale Garden Centres. 

The larger an organisation is the more it can potentially gain from recovery audit, but there are various other factors that influence the success of this type of initiative or enagagement. Transaction numbers, transaction value, and the period under review are amongst the most obvious, but the proportional impact of recovery audit can also be affected by issues such as resource constraints in accounts payable, plus developments or initiatives such as outsourcing and offshoring, mergers and acquisitions, staff turnover rates, changes to accounting and finance systems, the format in which transactional information is held, and underlying error rates (which the industry itself estimates at between 0.001% and 4%).

The type of audit recovery service and the provider’s approach also have an impact. At the simplest level, recovery audit is about taking transaction data in a variety of formats, transforming it for analysis, identifying anolamies and errors, and then working with or on behalf of the client to recover overpayments. But there is a lot more to it, not least because all of this is achieved using a combination of specialist software and manual processes – and some providers are more pushy than others. ‘We’ve picked up work from people that had not previously found recovery audit a good experience,’ says Charlie Watson, the accountant who started the recovery audit firm Caatalyst

‘You need to be determined and diplomatic to get the money back,’ explains Watson, ‘so we don’t give in after making five calls and sending 10 emails, but we don’t harass people either.’ Finding the right balance is inherently challenging though, because like many other recovery auditors, Caatalyst operates on a contingency basis. ‘It’s an end-to-end service. We don’t get paid until the money is in the bank,’ he adds. But not all contracts are this straighforward, so it is prudent to check out the small print in any engagement contract – or you could end up paying a fee for overpayments and errors identified by the recovery audit firm, even if it has not recovered them. 

The menus of services provided by recovery audit firms vary widely. ‘An increasing range of services is being offered under the recovery audit banner,’ reports Welch – which can be a mixed blessing. The rapid evolution of the industry and the growing range of products, services and providers, all contribute to the potential for confusion, and the term ‘recovery audit’ is now applied to numerous variations on the basic theme. Most recovery audit specialist provide the staples that have long characterised the industry, such as duplicate payments recovery, UK VAT recovery, international VAT recovery, statement credits recovery, tax payments and accruals audits, vendor statement audits, and import duty audits, but these are just the tip of the iceberg.

You will also find a growing range of more specialised services such as contract audits and healthcare claims audits – and in the United States there are organisations that specialise in recovery audit for Medicaid and the private health care industry. Some recovery audit providers offer marketing and media expense audits, property audits, and telecom billing audits – though this is another sector that boasts numerous specialist providers. Increasingly, recovery audit firms also offer post-audit services such as performance benchmarking and spend analysis. It’s worth pointing out that you will struggle to find a recovery audit specialist that offers all (or even most) of the services on this list, and some offer just a handful of them. 

Meridian Cost Benefit Analysis, for example, offers a cross section of services including basic recovery audit. ‘We can scrutinise electronic purchase ledger records going back 2, 3 or 5 years,’ says Welch, ‘then we scrub it and  look for errors such as payments to the wrong suppliers, or invoices that were paid twice.’ Other glitches often include under-recovered VAT: ‘Where OCR technology is in use error rates are low, but a person can easily misread “Nil carriage” as “NIL VAT”,’ he says, ‘and there are all sorts of possible pricing errors’. The firm also offers services such as telecoms analysis, property reviews, postal reviews and contract compliance reviews, with the support of various strategic partners.

The biggest providers tend to offer the broadest range of services, and across the widest range of territories.  PRGX for example, has offices in more than 30 countries and provides global services that it groups together as audit, analytics and advice – offering individual services and merging them into something it describes as Profit Discovery™. ‘This combines recovery audit with analytics and advice, to improve the financial performance of clients,’ says Romil Bahl, chief executive of PRGX Global. ‘We find overpayments, rebates, allowances, and discounts that haven’t been taken and put them back on the bottom line,’ he explains, and then use this as the basis to further increase profitability.

‘We say “What if we could just find three, four or five more routes to profit by looking again at the data our clients already entrust us with,’ says Bahl, who gives IT spend as an example. ‘This may appear as a line item in your general ledger,’ he says, but drilling down into the underlying data can reveal invaluable information. ‘If you look at infrastructure, and then hardware, you might see that you’ve spent $40m on laptops alone, and that you’ve done this with 11 vendors instead of your 3 preferred suppliers,’ adds Bahl, and whilst this is revealing, it may say more about the evolutionary path of recovery audit providers than it does about their core strengths.

PRGX may be offering this sort of insight as a service, but so do some non-recovery audit consultancies – and it’s not a million miles away from what a business can achieve itself with the support of specialist software tools for analytics/business intelligence/ performance management, or even the humble spreadsheet (albeit, with some considerable effort). The same is true, to some extent, of some of the core services provided by recovery audit specialists, particularly where software is concerned, because the sort of tools that were once the preserve of providers of recovery audit services are now more widely available.

Historically, recovery audit firms have closely guarded their specialist software but some (such as Apex Analytix and PRGX) now make it available to clients that want to run their own internal recovery audits, and specialist developers are also providing software – which is often the same software that providers of recovery audit   services are using to provide these. Providers of recovery audit software include Fiscal Technolgies, Gold Prairie and Kirix, and like providers of recovery audit services, they don’t all come at the matter from the same direction. Kirix, for example, specialises in data analysis, so as well as Kirix ProftPoint Recovery Audit Software, it also offers Kirix Strata, an ad hoc data analysis and reporting tool.

At Fiscal Technologies the emphasis is on accounts payable, and the AP Forensics Suite comprises a set of analytics tools that can variously be used (by accounts department or accounts payable teams) to detect duplicate payments and invoicing errors, as well as monitoring various types of compliance issue and minimising supplier fraud. Whilst Gold Prarie focuses on the automation of AP recovery audit. As well as providing the software app ProfitPoint, which analyses payment history data to identify duplicate payments, it uses this as the basis of a web-based ‘on-demand’ service that can continuously monitor your transactions for payment errors. So even if you can’t eradicate mistakes, there’s no reason why you can’t find and correct them.