Retail Best Practices for an Effective Recovery Audit
Recovery audit firms offer services across many industries; however, they have strong roots in retail due to the incredible volume of moving parts: inventory, rebates, goods not for resale, vendors, and general transactions.
The process of reviewing an enterprise's financial transactions, as well as the related data and operations, are done in order to identify and recover various forms of erroneous payments, over deductions, and under deductions to suppliers.
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Benefits of Recovery Audits in the Retail Industry
In retail, recovery audits increase the value of sales and improve your bottom line.
Next to sales, recoveries are the next best thing, because even though they do not increase the volume of sales, they do increase their value, with a direct impact on profitability… and at a rate that is low risk and cost-effective.
Within the recovery audit industry, on average for every $1 billion earned by a company, there is $1 million that can be recovered.
Retail recovery audits lay the groundwork for enhanced operational efficiency.
A secondary benefit of retail recoveries goes beyond hard dollars. It’s about data. In every audit, no matter the type, errors are identified and reported on. Organizations can use this data and the root cause analysis to make operational adjustments that address the source of the error. Fewer errors mean less repetition, and better financial data, which means more accurate financial reporting and forecasting.
Here are some of the errors typically found in recovery audits:
Clerical errors - This includes a multitude of inaccuracies such as duplicate payments to suppliers/vendors, unsent invoices, and incorrect data entries.
Operational oversights - Common mistakes come from unmonitored profitability (bottom line), unclear payment timeframes, and markdowns/price protection not taken.
Financial errors - These can be faults such as:
Overlooked discounts
Sales and use tax overcharges
Unissued rebates (or calculated incorrectly)
Uncredited returns
Unprocessed credits
Unnecessary escheatment
Wrong supplier payments
Pricing errors
Missed allowances
POS allowances missed (or calculated incorrectly)
Related reading: 4 Common Freight Invoice Errors that Cause Overpayments
Accounts Payable (AP) recovery audits can protect supplier relationships by preventing vendor disputes.
For retailers to exist, suppliers must exist - and vice versa. This mutualistic relationship is necessary for survival. Therefore, protecting supplier relationships, while also holding all parties accountable, is necessary. Recovery audits offer a route to proactively manage supplier relationships:
Recovery audits help retailers identify and address issues related to contract compliance before they damage the supplier relationship.
The identification of operational issues in a recovery audit can be addressed to prevent future mistakes, further protecting vendor relationships.
Getting to error prevention means avoiding the operational costs associated with vendor dispute resolution.
Recovery audits in the retail industry mitigate the risk of fraud.
While this is rare, fraud occurs when companies allow the conditions to exist, leaving them exposed to a lack of visibility around any monetary process. If an employee is motivated, the only way to prevent fraud is to remove the condition that would allow this to go undetected. A regular review of all financial contracts and transactions will mitigate the risk while the visibility of an audit serves as an effective deterrent. Couple that with the root cause analysis that’s supplied as part of the audit process, it allows companies to address areas of potential concern so that these areas of weakness can be eliminated.
Risk-Free + Efficient
Contracting with an outside recovery audit firm is a great way to capture revenue leakage without dedicating company resources to the task. Because recovery audit firms function under a contingency-based payment structure, fees are determined by whether or not they find errors AND the value they are able to recover for you. Therefore, if your company does not experience any financial gain from the audit, then it is of no cost to you.
Best Practices for Retailers
The purpose of a recovery audit is to maximize the fruits of a company’s labor. In order to maximize the value of a recovery audit…
Make sure to have clearly defined and documented audit guidelines. By setting clear standards and guidelines during this process, retailers help their recovery audit partners meet their goals and expectations. It makes for a more efficient process by providing a clear picture for auditors, resulting in less time spent going back and forth in a never-ending chain of emails. By providing transparency, you reduce disputes and confusion between you and the suppliers which in turn helps strengthen that relationship. In the end, this will minimize the time spent on the auditing process and improve the company's bottom line.
Transparency with your partners. Supplier Relationship Management (SRM) is critical for a healthy relationship. To avoid operational costs of dispute resolutions and damaging your supplier relationships, providing access to real-time visibility of the audit process is key. Other ways of providing transparency include agreeing to clear audit guidelines, providing clear claim files with full evidence in support, and leveraging audit platforms to enable on-demand visibility and agreement of claims.
Related Reading: How to Strengthen Supplier Relationships by Reducing Risk with Contract Compliance Audits
Set your intention towards Audit Acceleration by shifting the audit process as close to the transaction as possible. Money in the bank today is more valuable than money six months down the road. For this reason, transactions need to be as close to real-time as possible, so that money is not lost or overlooked and that you capture maximum profit recovery. With current technology and audit processes, the best auditors can provide detailed audit reviews within the time of your supplier payment terms or even pre-event - enabling you to review if payments-to-be-made or contributions-to-be-received are accurate the first time around.
Beyond that, from the supplier’s perspective, it’s easier to remedy when it’s closer to the transaction. Companies don’t want to be paying money back to your organization for a transaction that happened 1-2 years ago. The immediacy of audit acceleration increases the likelihood that the people involved in the original negotiation still work for both companies and all necessary documentation is readily available to ensure that your organization can quickly clarify what is due and make the recovery.
Related Reading: 10 Common Errors in your ERP System
Leverage multiple recovery audit firms. Where the scale or complexity of your company allows, it can be sensible to leverage multiple recovery audit firms. Each audit firm has particular tools and techniques; so by using more than one, retail companies are able to attain greater monetary benefit than those who solely rely on their own internal team or a single firm.
Many large organizations have an internal auditing team that forms the first line of defense to ensure money does not leak from the business. A typical internal audit will uncover around 35% of the value that has slipped through the organization’s financial processes. If an organization stops at the internal audit, they risk losing 65% of the potential recoveries. This is not because internal teams have an inadequate skill set, but rather, because they have other responsibilities and a finite amount of resources to review as meticulously as necessary to capture the remainder of recoveries.
Once the internal audit is complete, the primary external auditing team will check to see if anything was missed by the internal team. A good external auditor firm conducting the primary audit will recover the bulk of recoveries - typically between 50-60% of total findings (where an internal team is also in operation). This is why it can be useful to use a second audit firm to provide a final review of your transactions, as there could be as much as 15% of potential losses still to identify and recover. They also act as a useful test to see if your internal and primary audit firms are efficient and effective.
Because each recovery auditing firm has different tools, technologies, and processes, having multiple firms can yield greater value. Because recovery auditing is done primarily on a contingency-based approach, there is little risk for the client, but high potential rewards.
Did you know… Most recovery audit firms only focus on the top 20% of suppliers that typically deliver 80% of the claims. The best firms ensure a 100% review of supplier income agreements + transactions and typically uplift recovered value by more than 20%.
Leverage learnings from recovery audit to support continuous operational improvement initiatives. The reason why the recovery audit industry exists is because of the internal operational issues that inevitably appear and grow complex as enterprises scale their business. Given that recovery audit firms see these issues across many industries and geographies, they can provide real operational insight and can be seen as an independent, unbiased resource for improving your company’s operations. Your recovery audit partner can provide meaningful input into mergers, changes in technologies, addressing employee turnover, or any area where you have complex data. A better understanding of your data drives better commercial decisions.]
Learn how to protect your cash flow and retail margins by proactively preventing errors in payments in our blog, "Error Prevention: Why Recovery Audit Isn’t Enough in the Retail Industry." +
Data Required for the Recovery Audit
In order to gain the most from a retail auditing experience, it is imperative to provide specific data and logistics covering a company’s finances and how they are handled. Here is a checklist of the main data types required for a successful recovery audit:
Sources of data
Contracts
Deal sheets
Purchase orders
Invoice receipts
Invoice transactions
Disbursement transactions
Payments
Email data
Vendor file(s)
Relevant transaction processing systems
Purchasing
Accounts Payable
P-Card, credit card, fuel card, etc.
Wire transfer
Electronic payments
How is your recovery auditing process going?
If you are questioning your current process, check out our Recovery Audit Partner Evaluation Scorecard.
If your company currently works with a recovery audit firm, find out if you are receiving the best and most profitable service possible - Check out our Recovery Audit Partner Evaluation Scorecard and discover if your partner is covering all of the necessary bases to set you up for success.
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