Reap the rewards of recovery audit

Recovery audit is widely accepted as good financial practice in the private sector, yet is still largely unadopted in the public sector. Far from being a witch hunt, recovery audit is a healthy process that sensitively roots out and rectifies the inevitable payment errors that naturally occur in any large organisation dealing with a high volume of payment transactions. So why aren’t more government departments harnessing the potential of recovery audit, and how do they derive maximum value from it?
    
Global managing director of business development Adam Simon and client services director Jon Francis, both from PRGX – the leading recovery audit firm which was commended for its outstanding contribution to the public sector at the latest Government Business Awards – unravel the myths around recovery auditing and ask whether civil servants can afford to ignore it.

PROCEED WITH CAUTION
The concept of recovery audit has traditionally been regarded with a degree of caution by the public sector. In many ways, that is understandable. The thought of an external agency combing through up to six years of spending data to seek out anomalies is not a particularly comforting prospect. However, attitudes are beginning to change.
    
In essence, recovery audit takes transaction data, transforms it for analysis, identifies errors, and works with suppliers or providers to recover overpaid cash.
    
At a time of government pressure to find savings fast, an increasing number of senior civil servants are learning to embrace the kind of scrutiny that has long been successfully deployed by large private sector companies to review past payments and claw back any money leaked from of accounts as a result of accidental overpayments.
    
That initial sense of trepidation is gradually being replaced by a recognition of the significant benefits that recovery audit can deliver. In stark financial terms, recovery audit generates otherwise unavailable money by recouping cash that has been lost from the system.
    
The Home Office and Department for Transport are two bodies that have recently embarked on recovery audit programmes, each with highly rewarding results.

A COMMON OCCURANCE
The first and most critical misconception regarding recovery audit is the fear that the process is a finger-pointing exercise with the sole purpose of singling out those responsible for payment errors. Let’s not beat ourselves up. Overpayments occur in all organisations, particularly large organisations dealing with a large volume of transactions. They are inevitable.
    
As evidence of this, PRGX states that it has never encountered an organisation without any recognisable and recoverable overpayments. With the cost of the audit structured as a small percentage of the amount that is recovered, it’s a ‘no win, no fee’ arrangement.
    
Most large and successful companies in the private sector accept this and view recovery audit not as an interrogation but as a natural component of their quest for best practice. In other words, it’s a good discipline to adopt.
    
One issue that makes recovery audit a particularly timely concern for the public sector is that organisations undergoing significant structural change are particularly vulnerable to leakage in their payment systems. The administrative transitions that the public sector has undergone in recent years, and continues to do so, make this a pressing concern.
    
When you combine that with the political drive to achieve efficiency savings while protecting frontline services as far as possible, a compelling case for recovery audit begins to emerge.

CONFIDENTIAL INFORMATION
Yet an innate hesitancy still remains in some quarters. One reason is the highly confidential nature of the particular information that comes under the microscope. This is where the discretion of the recovery audit agency becomes vitally important. The best organisations in this sector are highly sensitive in their approach, not only when poring over up to six years worth of classified data but also in dealing with suppliers in the process of recovering money.  It is a process that benefits from having a third-party agency involved to conduct negotiations that are fair, but also firm.
    
However, deriving maximum value from recovery audit isn’t just about a one-off result. The longer-term benefit is in identifying instances where procedures or policies could be improved to reduce the occurrence of payment errors in the future.
    
Initiating a cash recovery programme is not about admitting any fault but indicating a determination to improve efficiency over the long-term.
    
Typically, a list of recommendations will follow from the findings of a recovery audit, but it is up to the organisation concerned to act upon them. Thankfully, the majority do so. In the experience of PRGX returning to conduct a second audit within a year of the first, there is generally a 50 per cent reduction in cash leakages. However, the commitment to efficiency has to come from the very top of an organisation. Where this happens, organisations can gain a raft of new insights into their relationships with suppliers.

MAINTAINING RELATIONSHIPS
A common concern is that the process could irreparably damage relationships with suppliers. In fact, by exploring those relationships and generating detailed spending data that may never have been accurately and comprehensively compiled before, both sides can move forward on a platform of greater clarity and openness.
    
Many suppliers are unintentional recipients of overpayments and are keen to learn how to avoid the rise of similar problems in the future. The recovery audit process not only benefits those who procure, but it also provides an opportunity to identify ways in which suppliers can honour the terms of their contracts more effectively.
    
There are two further vital factors that should be borne in mind by those pursuing a successful recovery audit programme. The first is the close cooperation of the IT department. At the outset of the process, the IT specialists of both the organisation and the audit firm must work together to identify the necessary data for extraction before it can be securely processed. This may require security clearance to be sought from senior individuals.
    
Secondly, it is important that the audit firm briefs management and staff about the objectives of the process, which will avoid being intrusive and strive towards helping, rather than criticising. Their support will prove to be invaluable.
    
The question for government organisations is whether they can afford to ignore the pain-free savings generated by recovery audit.

STEPS TO A SUCCESSFUL RECOVERY AUDIT

A recovery audit is performed to review supplier compliance to contractual terms and to recover any over payments that may have occurred. It involves a granular review, by professional auditors, of all accounts payable transactions for up to six years in the past. There are a variety of checks that can be made by the auditors using their specialist toolset for example:

•  Has any invoice been paid twice? This can easily happen where split invoices or copy invoices are processed or where multiple supplier names are held on the vendor master file

• Has the supplier statement been fully reconciled? Many organisations routinely review the ‘top 70-80 per cent by value’ believing that the residue is not worthwhile. PRGX experience suggests otherwise: small suppliers can have transaction complexities which leave issues unresolved

• Have invoice costs been fully aligned with an agreed contract? Is the price the same as that agreed by email with a buyer? Have agreements to make refunds under certain conditions been checked? Have ‘cost-plus’ contracts been reviewed on an open-book basis?

The audit firm will deal with the whole process of audit to recovery – specifying data requirements, processing and auditing the results with reference to the client’s records or contracts, reconciling supplier statements, contacting suppliers where errors are found and recovering the funds from the supplier. The real benefit is that there are no fees for handling this process, the auditors are rewarded on a percentage of recoveries made and they’ll even give you a report with improvement recommendations as part of the service.

PRGX AND THE GOVERNMENT
PRGX is the world’s leading recovery audit firm, and has more than 200 clients across 15 European countries. The company has recovered an average of $1 billion per year for its global clients over the past five years. However, it is in the public sector where the company’s portfolio is growing most rapidly. In the UK, PRGX has won considerable acclaim for its contribution to public sector efficiency.

Last year, a recovery audit carried out on behalf of the Home Office earned PRGX outstanding plaudits at the Home Office’s annual Supplier Value and Innovation Awards, where the company won the ‘Most Beneficial Contribution by a Small-Medium Enterprise’ category.

More recently, the same project was recognised at the Government Business Awards, where PRGX was one of three finalists nominated for the showpiece category ‘Most Outstanding Contribution to the Public Sector’.
    
Adam Simon, global managing director of PRGX business development, said: “We are extremely proud that our work with the government has been recognised in this way, particularly as it champions the collaborative approach to best practice that we are well known for. It’s very pleasing to see the public sector harnessing the very best private-sector expertise and technology in order to put efficiency and effectiveness at the very top of the agenda.
    
Our recovery audit service benefits from the deployment of experienced auditors and specially-developed data analysis tools in order to efficiently and sensitively identify payment errors and recover cash that would otherwise be lost. The results have proved invaluable to the wide range of organisations we are privileged to work with.”