What is an Accounts Payable recovery audit?

Whether it’s overpayments, duplicate payments, incorrect sales tax or payments to the wrong suppliers - Accounts Payable mistakes happen in any organisation processing loads of invoices. These mistakes may seem small at first, but they can heavily affect an organisation's working capital and add up to substantial losses over time. Some companies still invest in AP recovery audits to recoup any overpayments and regain financial losses. 

What is an Accounts Payable recovery audit? 

Simply put, an Accounts Payable recovery audit is a look-back at all your company’s transactions to ensure your vendor statements are accurate. Recovery audits can either be conducted on historical data or done in real time. 

This process helps iron out errors like overpayments, duplicate payments, pricing discrepancies, unclaimed credit notes and more. 

AP recovery audits form part of a reactive process to payment errors and don’t always give detailed insight into these accounting errors. It can often take months to recoup payments and audit fees are high. This is driving more and more finance departments to take a more sophisticated and proactive approach to payment auditing, using AI. There are some fantastic solutions available to identify incorrect and duplicate payments before the pay run, removing the need for costly recovery audits that damage your cashflow.

How does an AP recovery audit work? 

Businesses with high invoice volumes often spot payment errors during or after the pay run. Some companies might never find out they happened, where they happened and why they happened in the first place. An AP recovery audit can identify a payment error and recoup the money lost. It is highly unlikely that 100% of overpayments will be recovered, especially if it’s been a little while since payment was made.

Recovery audits are often conducted independently through a recovery audit contractor or by recovery audit firm.   

Here's how the process is carried out:  

Step 1: Gathering intel

Step one is to get together all your company’s Accounts Payable transactions data. This includes invoices, payment records, contracts, credit notes, purchase orders and any other relevant documentation to hand over to your external auditors or recovery audit firm.  

Step 2: Spotting errors

What happens next is a thorough examination of all your Accounts Payable records to highlight potential errors or inconsistencies. This may involve comparing an invoice to a purchase order or payment record, looking for a duplicate payment, pricing errors or other payment related mishaps. 

Step 3: Getting to the bottom of things

Once all errors have been identified, it is time for some root cause analysis. Why did that payment happen and how did it slip through the net? This step of the process may involve contacting vendors to verify details, review contracts and/or ensure all payments have been made correctly.  

Step 4: Recouping lost money 

In case vendors have charged an incorrect amount or duplicate payments have been made, the next step is to initiate the recovery process. This could involve contacting the supplier to request refunds or credits for any overpayments, negotiating with suppliers to resolve discrepancies or adjusting Accounting records to correct payment errors.  

Step 5: Documenting and reporting

During the recovery audit process, it's crucial to maintain a detailed log to track findings, update internal records, and ensure compliance with corporate guidelines. Additionally, providing detailed accounts payable reports on findings is essential to keep all stakeholders informed.

Step 6: Learning from mistakes and prevent future errors

As well as recovering an organisation’s revenue, an Accounts Payable audit can provide some valuable insight into existing Accounts Payable processes. Organisations can use the information to identify parts of the AP function that aren’t working as they should and can work towards smart solutions like AP automation tools.

An AP audit recovery process helps businesses ensure the accuracy and integrity of their Accounts Payable transactions, recover payments that have been made incorrectly and strengthen their internal controls and payment processes.  

Why an AP recovery audit is important

Simply put, the main benefit of an AP recovery audit is to allow businesses to recover incorrect payments. But it also opens the door to improve broken processes that are letting payment errors be made in the first place. Regular audits may help identify and address financial risks or inefficiencies, safeguarding the overall financial health of a business.

Audits enable businesses to stay compliant with contractual obligations and regulatory standards. This means that they are free from errors, fraud or misinformation. An AP audit ensures a company's AP processes are conform with compliance policies and external regulatory requirements. It helps in identifying potential risks in the payment processes and opens the opportunity to explore new measures to mitigate them.  

What types of businesses need a recovery audit?

Businesses across all industries use AP recovery audits to ensure financial records are accurate and up to date. Organisations with high invoice volumes are most at risk of accounting errors and should consider investing in a recovery audit on a regular basis – perhaps 6-monthly.

How does an AP recovery audit affect your cash flow? 

Taking a reactive approach to payment errors unfortunately will hamper your cashflow, as well as impact the real-time accuracy of your financials. An AP recovery audit falls into the reactive bucket. By implementing a preventative solution, cash flow will remain healthy as you are preventing improper payments leaving in the business in the first place. Additionally, AP automation tools can also remind transactional teams of unused credit notes, ensuring AP teams are spending credits rather than taking more cash from the business when it’s not needed.

How much does a recovery audit cost? 

There is no one size fits all when it comes to recovery audit service costs. Many firms operate on a ‘no win, no fee’ basis, meaning that fees are contingent upon recovered funds. The pricing structure can vary, some auditors may charge a fixed fee plus commission while others might only take a commission, usually between 10% to 40% on the retrieved fund, allowing businesses to align costs with results.  

Spending your budget on recovery audits may not be viewed positively by your business. While recovery audits can identify and recoup overpayments, there are various ways to prevent payment the errors in the first place, such as implementing the right tools to automate error-prone Accounts Payable processes.

How often should recovery audits be performed?

An answer no one really likes: It depends. How often a business needs to carry out recovery audits depends on their size, the complexity of their payment processes, industry standards and internal risk management practices. It is recommended for companies to conduct them regularly, such as annually or bi-annually. However, some organisations choose to conduct recovery audits more frequently, like quarterly or monthly.  

Replacing your recovery audit with Xelix's Transactions module

Xelix removes the need for costly recovery audit services by pulling data from your ERP and Finance system(s) and performing a real-time audit, resulting in major cost savings, process improvement and happier, more empowered AP teams.

Xelix uses advanced AI to analyse invoices across 400 data points, spotting everything from simple data entry errors to complex fraud attempts.    

If you‘d like to see the Xelix platform in action, get in touch with our team or book a personalised demo with us. Even one month out from audit time, Xelix can turn things around.