financial Leakage Opportunities in Accounts Payable

Often Accounts Payable is one of the most understaffed departments in the company.  This means you do not have time to look at smaller partial credits that are received if you do not know where to apply them.  There might be times when errors occur due to multiple occurrences of a vendor in the Master Vendor List.  If something like a partial damaged shipment occurs and it does not get entered in your system AP goes ahead and pays the entire invoice.  There are many areas where errors can occur that are beyond your control.  The good news is statistics have shown your staff does everything correctly 99.9% of the time!  The bad news is that 1/10 of 1 percent on $1 billion in spend equated to $1,000,000.00.  What could your company do with an extra million dollars? 

RLC understands the plight of Accounts Payable.  That is why we avoid pointing fingers at Accounts Payable for errors in the system.  Instead, we work hand in hand with Accounts Payable to correct the situation and communicate to management that we were able to help you find errors that were beyond your control.  We want to be a friend of Accounts Payable! 

Less and less cash leakage is found due to duplicate payments because of the new more comprehensive tools being implemented by corporations today.  There are still errors found in these audits though. This is how findings typically map out during an audit: 

• Returned merchandise – 35.80% 
• Rebates – 4.64% 
• Defective payment – 11.66% 
• Duplicate payment – 24.72% 
• Overpayment error – 10.33% 
• Unable to obtain credit type – 7.17% 
• VAT underpayment – 0.56% 
• Unapplied Cash/COA – 1.82% 
• Price adjustment – 2.33% 
• Billing error – 0.56% 
• Batched credits – 0.25% 
• Debit balance collection – 0.10% 
• Cost recovery – 0.06%

More and more clients we work with say although the payout in duplicate payments isn't what it used to be there is still a lot to be found in a statement audit.  RLC has an in depth statement audit process called Supplier Credit Recovery.  In a statement audit we are looking for credits that appear in your suppliers' systems but don't appear in your system.  Why would this occur?  Here are some reasons:

• Usually AP is centralized and documentation for credits received by operations for returns, inaccurate quantity at receipt, damages, etc. are usually not sent to AP.  AP receives the invoice only and total invoice is paid. 
• Procurement often doesn’t communicate things like new contracts, pricing arrangements, rebates, etc. to AP so AP continues to pay per original contract. 
• Often the matching algorithm in the ERP system is not sensitive enough to detect duplicate payments caused by things like typos in the date field by the vendor when resending an invoice, because the matching criteria requires all 3 fields (amount, vendor number and date) to be considered before it is seen as a duplicate payment and rejected prior to processing 
• Consolidations, acquisitions, and mergers lead to Vendors being added multiple times.  Multiple invoices can be sent by Vendors under different names or numbers for the same goods or services. 
• Enterprise Master Data is not routinely scrubbed for duplicate Vendors (Vendors are entered into the system multiple times under different vendor numbers or names).  AP typically is run so lean they do not have the resources and time required to regularly maintain the data. 
• Many times numerous payment systems are used by the AP Department.  It is possible that an invoice could be submitted for payment as an invoice, paid by a purchasing card or submitted as a check request. 
• Most AP departments require that payment only occurs with an invoice.  Statements are not allowed for payment.  Credits appearing on the statements would not be seen by AP staff. 
• Unless they are a “sensitive” Vendor, most AP departments do not routinely reconcile Vendor statements again due to lean AP departments with a lack of resources. 

Many times we are asked if you must do both of these audits together.  The simple answer is no, but it is easier to do them both at the same time and it will maximize your return.  If you are going to do just one you should choose a statement audit.  It will generate the biggest return, require the least amount of data, and require less time and effort on your part.  

For a duplicate payment audit typically 3 years of transactional data is pulled to be analyzed through an algorithm enabled software to look for anomalies that could turn into credits.  The amount of anomalies will greatly outnumber the number of credits and someone has to research and verify these that is why a contingency based third party is your best best.  There might be $10 million of anomalies, but this might only yield $1.5 million in credits.  The easiest way to do this is to give your third party audit "read only" access to your system to allow them to do all the verification for you.  

For a statement audit the data required is a complete copy of your Master Vendor List along with addresses, contact names, email addresses, phone numbers, etc. along with the spend for that vendor over the last year.  The best bet again is to give the auditors "read only" access to your system to make sure these are credits you are unaware of.  Alternatively you can supply an open credit report on a regular basis listing the credits you are aware of.

During a duplicate payment audit errors will be found over the span (typically 3 years) of transactional data you supplied.  During a statement audit there is no limit to the time period for which you may find a credit.  We have at times found 5 digit credits going back as far as 10 years.

Many companies ask if it is worth purchasing third party self auditing software rather than go with an audit.  The answer is maybe.  Keep in mind these software packages will find the anomalies for you, but they must still be researched and verified whether or not they are truly a credit.  Do you have the staff and time to take on this task yourself?  If not, you are better off paying a third party a contingency fee to do this work for you.

The other factor is the cost of the software versus the return.  For example, if during your last third party audit the company recovered $1 million in credits and charged you a 25% contingency fee it cost you $250,000 to accomplish that.  Companies typically charge subscription fees for self auditing software and the fees are based on number of annual invoices processed and number of ERP systems/instances they must connect to.  They might want to charge you an annual subscription fee of $300,000 plus the cost of your staff's time to research and verify the anomalies.  In that case the ROI is just not there!

RLC's goal is not to make Accounts Payable look bad.  In fact our goal it to help AP and make your job easier.  If you have a Duplicate Payment Audit keep in mind that these audits typically find less than 1/10 of a percent in errors.  That means you were error free 99.9% of the time.  Imperfect humans can get any better than that.

When it comes to a Statement Audit almost all the leakage we find is a result of things that Accounts Payable didn't know.  If someone neglected to inform you, or put something in your ERP system how are you supposed to catch it.  By requesting a Statement Audit AP is actually carrying our your fiduciary responsibility by stopping unknown revenue leakage.