StreamALERT AP: February 2006

Recovery Audit Solutions: Service, Software or Both

In the late 1960's, a large department store rushed hundreds of invoices through its AP system without taking time to verify the accuracy of the payments, creating an accounting nightmare. Soon thereafter, the retailer hired a new controller, Howard Schultz, who ordered a thorough review of all payments. His decision netted roughly $40,000 in overpayments, a lot of money in those days. Seeing an opportunity for conducting recovery audit services (RAS) for other organizations, he formed Howard Schultz & Associates in 1970. His first month in business he recovered more than $250,000 of lost profits – and an industry was born.

For many years since then, corporations intent on squeezing more profit from existing operations have turned to recovery audit services (RAS) to recoup lost profits. Money that would have otherwise been lost, misapplied to the bottom line of suppliers instead of shareholders, is instead added to income statements of companies all over the world.

As with other businesses, the advances in computer technology have been felt in the recovery audit space too. Most recovery audit firms employ some technology to help them identify and recoup missing revenue. Some of them market their own brand of preventive, analytical and reporting software; the same software they use to conduct audits. And finally, other firms sell stand-alone RAS software to be used by your own in-house AP professionals.

The Case for Recovery Audits

There are a number of reasons a recovery audit is a good idea. First of all, it’s your money. If the payment error had not been made in the first place your profits would have been larger, your shares more valuable, your cost of capital lower and so on. Another good reason is it is practically free. Without exception, each and every RAS firm conducts its business based on a contingency fee basis. The entire RAS industry operates on the knowledge that it will find recoverable payment errors. The fee charged by service providers is, almost without exception, a percentage of what is uncovered and ultimately collected. So, why leave money on the table? 

Another more recent impetus for conducting a recovery audit is Sarbanes-Oxley; more specifically the compliance information that can be gleaned from a recovery audit. A recovery audit covers much of the same ground a CFO must cover to ensure the integrity of a business; from process controls to contract compliance to payment checks and balances. A recovery audit will provide detailed reports on the financial health and well being of your payments process and contract compliance.

Different Flavors of RAS

There are three models of recovery audit service a client has to choose from. PayStream has elected to describe them below as: Full Service, Hybrid and Stand-alone Software.

• Full Service — A full service recovery audit includes a “boots on the ground” approach supplemented with technology, a collection strategy and consultation to mitigate future losses—in short, a complete end-to-end process that not only maximizes recovered dollar amounts but also provides a framework to prevent overpayments going forward.

All of the full service RAS firms employ technology to aid them in their search for legitimate claims against suppliers; however, not all of them offer software for sale to prevent future erroneous payments.

Full services RAS firms do play some role in the collection of claim amounts from suppliers. However, their involvement in the process and ultimate resolution of the claim varies from complete to partial responsibility.

• Hybrid Service — A hybrid service means the RAS firm’s auditors and the client’s internal auditors form a team to perform the recovery audit process. The same phases are completed and some or all of the same propriety RAS software is used to conduct the recovery audit. In short, the only material difference is the make-up of the recovery audit team.

The fee for a hybrid service is less than that of a full service recovery audit but also varies with the size and scope of the project. Hybrid arrangements often, but not always, involve proprietary software for sale to be used post-audit. The price of the software may be priced into the engagement or sold separately.

• Stand-alone Recovery Audit Software — RAS software is sold for installation and implementation in-house, by the customer’s staff, and is designed to be used as a substitute to a full service or hybrid recovery audit. The RAS software may be sold by a “software only” company or an otherwise full-service or hybrid RAS provider.

Future of RAS

We believe the market for RAS solutions will grow modestly over the next five years between 5 to 7 percent annually. Domestic recoveries of lost profits by RAS solutions approached $5 billion in 2004 and we project recoveries will grow to $6.8 billion by 2010. Specialty RAS providers, especially those exclusively serving the telecommunication, freight or utilities markets, account for about 40 percent of the RAS industry and are a key ingredient to the growth of the RAS industry.

PayStream Advisors’ latest Corporate Insights Report titled, “Recovery Audit Services: It’s Your Money”is available for download from our online store. This report, profiling leading recovery audit service providers, offers valuable insights into RAS solutions and helps managers compare and contrast different solutions to identify the one that bests suits their organizations' requirements.