Recovery auditing is the systematic process of examining disbursement transactions and related supporting data and documents to identify and recover various forms of overpayments and under-deductions from suppliers. The types of mistakes that are found include duplicate payments, missed discounts, rebates, overcharged sales taxes, unclaimed property, deposits, fraud and other amounts.
The recovery services are generally provided to the largest corporations because the percentage of mistakes is very small and therefore a large population of payments is required to find enough mistakes to make a recovery project worthwhile. It can take the auditor a long time to learn a client's business practices, find the mistakes and arrange the vendor reimbursements. Generally a company must have minimum revenues of $100 million dollars a year to be a suitable candidate for a recovery project.
Recovery audit firms offer their services purely on a contingency basis, so there is no financial risk to a customer. The onus is on the recovery firm to be effective and to find mistakes. If no money is recovered from the vendors, no fees are charged.
In addition to the cash recoveries, the client receives feedback about those areas in which the recoveries were found, plus additional information. The client can use this added-value information to adapt its procedures to prevent similar errors from occurring in the future.
The services are generally provided in the client's offices by on-site audit staff because that's where the invoices are located. From time to time a client will allow an audit company to remove the papers for off-site review, but this is unusual. There is a new arrangement that has developed as a result of document imaging. Because the invoices are now electronic they can be accessed anywhere via a web connection. This means they can be reviewed from anywhere in the world.
Recovery auditing is a relatively new industry, having started in the United States less than 50 years ago. It began in the retail trade where there are numerous discounts, allowances and adjustments which were hard to track, especially on a manual basis. The rise of computers enabled more sophisticated data mining techniques. Today there are electronic methods to manage discount programs and specialized software available to find duplicate payments as well as to manage the collection process. Most large companies are aware of the benefits and have their files examined periodically to ensure nothing has fallen through the cracks.
There are similarities between the recovery audit firms and the larger public accounting firms as to the relationship they have with their clients and delivery of services. With respect to relationship, there is a learning curve when a company performs a recovery audit, as each party gets to know the personnel and habits of the other. When a relationship becomes established there is a "comfort factor" and it is harder to switch to another firm as long as the recovery firm is doing an adequate job. With respect to services, both perform an audit function using professional accounting staff. Both services are provided on a yearly basis (or maybe every other year for the recovery firm).
As a matter of interest, the biggest accounting firms were adding recovery auditing to their service offering until Congress legislated forced independence between accounting firms and their public company clients as part of the sweeping Sarbanes-Oxley legislation in
2002. Most of those recovery services are restricted to data mining (analysis) projects offered to companies who are not audit clients. These data mining services can be useful but they put the onus on the client to conduct the due diligence. In our experience most of these projects result in minimal success because accounts payable staff is not committed to non-essential work.
The current environment of the recovery industry has large companies adopting more of the review work, mainly finding duplicate payments using specialized software. Internal audit departments are becoming more diligent looking for opportunities to repatriate misspent funds and keeping the fees otherwise paid to outsiders; however, recovery firms still make an impact especially with electronic methods manipulating large data sets.