Overcoming
Challenges to Moving Cost Recovery Projects Forward
by: Richard B. Lanza, CPA, CFE, PMP
There are a number of reasons many
firms remain resistant to recovery auditing, but they can generally be grouped into
three main categories:
Morale/Motivation Issues
When an audit discovers a problem
within the department, (i.e., Procurement or Accounts Payable) there can be embarrassment
in showing vulnerability, but the alternative is even worse. Maintaining ignorance
or pretending the problem doesn’t exist only allows it to fester and worsen over
time.
Usually others within the company
will see the problem, but not want to intrude on another department’s business,
so they will essentially bury their heads in the sand hoping someone else will notice.
Compounding this is the fact that managers find it doubly embarrassing to contact vendors,
explain the problem to them and ask for refunds.
When an outside auditor comes into
a company and finds errors, it tends to shine a spotlight on the company’s shortcomings.
For this reason, managers are reluctant to allow audits. The problem with this approach
is vendors are then left to their own devices in determining whether or not to voluntarily
return erroneous overpayments – and many won’t.
Another related objection to recovery
audits is the idea that many employees consider internal controls a private issue,
and bringing in an outside auditor not only gives the auditing firm sensitive information,
it gives it to them for free. Employees tend to treat control weaknesses the same way
most people treat family secrets. It’s preferable to most employees and managers
alike to keep the secret – regardless of the cost.
In general, most people fear confrontation
and recovery audits confront issues in business processed. When errors are uncovered,
processes have to examined and corrected.
Business & Procedural Obstacles
In some cases, there’s a practical
reason for resisting audits. For example, with government contracts, federal acquisition
regulations dictate that only federal contracting officers deal directly with vendors.
Below are some additional, less practical reasons.
CEOs are focused primarily on reaching
sales targets and achieving desired growth. To many of them, the mindset is that as
long as these benchmarks are met, the bottom line doesn’t really matter. Executives
are largely unaware of the specific role staff play in collecting spend analysis and
compliance information, and of the key supplier relationships managed by the team.
They are also unaware that vendor overpayments are essentially hidden assets that belong
to the company, but will not be returned unless vendors are asked. If the focus was
placed more on the bottom line from top management, more departmental managers would
be willing to “find the savings.” They would find that a few percentage
points saved in their total accounts payable spend translates into that same percentage
being directly added to the bottom line.
Companies are always fighting a six-headed
hydra, which is biting them every chance it gets. Because of this, staff tend to fight
what they can, and focus only on what they see as the top priority. There isn’t
time to focus on improvements, but if they did the hydra would have less of a reason
to bite. Bringing in an outside firm to conduct an audit is an excellent means of locating
and stopping cash leakage. There’s essentially no cost involved because any fees
are paid for by cash recovered, and firms are provided with valuable advice on how
to stop the leakage from recurring.
Some industries such as wholesale
grocers and food & drug distributors are more prone to accounts payable errors,
in part because these industries rely on multiple warehouses and PO-issuing sites.
The complexity of contract issues during the purchase processes for these organizations
may result in missed discount credits, freight and tax issues. While additional controls
and technology solutions are a good first step to overcoming the complexity, independent
validation by an outside auditor represents a final safety net for cash savings.
Financial Impact
It is far worse for an overpayment
to go unrecovered because it is years old than to find it, get it back, and set best
practices to move it forward. Use of the free resources that a recovery auditor provides
can bring over 100 years of combined experiential knowledge to the table. Aside from
the improvements that can come from a skilled audit team, a recovery audit usually
costs 30 cents in fees for every dollar collected, which puts 70 cents back in the
company’s coffers. The alternative is to continue letting untold dollars to vanish,
undetected.
Most departments, especially Accounts
Payable, are hamstrung as they are among the last functions to receive budget and resources
to repair weaknesses in business processes, automation, or data management. Furthermore,
they are generally unable to get the additional staff required to complete the labor
intensive process of recovery auditing and vendor collection.
Sometimes the best approach is to
get started with a recovery audit and, once savings are detected, produce a cost benefit
analysis that such an effort should be completed internally going forward. Many companies
decide it is cheaper to pay the fee knowing the job will be done right by a business
partner who has a full incentive to get it done.
Moving Forward
For those departments who have not
completed a recovery audit of their spend, they should recognize:
-
Every company has errors and it is better to be
proactive than to pretend the issues will go away.
-
Internal control best practices should be learned
from those that have seen other business processes, not from the ones who created
the internal process confusion.
-
By seeing the errors and measuring them, companies
have more incentive to prevent them in the future, which leads to cost beneficial
funding of improvements.
-
Not acting because of the fear of recovery fees
loses the company 70 cents on the dollar every year so it is better to get started
as quickly as possible.
Over time and as the business case
allows, organizations can expand their internal efforts to identify overpayments before
turning to external recovery specialists. By taking this more proactive approach and
detecting a greater number of possible overpayments themselves, organizations can keep
professional recovery specialists focused on the more complex, sophisticated analyses
required for complicated recoveries.
Rich Lanza, CFE, CPA/CITP, PMP, and
President of Cash Recovery Partners, LLC, helps companies
identify their hidden financial assets, mostly by using
technology and referring them to specialists. He has two free Web
sites: www.findmillions.net, and www.auditsoftware.net. His e-mail address is: rich@richlanza.com.
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