Recovery auditing is the systematic process of examining disbursement transactions to identify and recover overpayments. The types of mistakes that are found include duplicate payments, missed discounts,
unrecorded credits, incorrect rebates, sales tax overcharges, unclaimed property, deposit
monies not credited, payments to the wrong vendor and other issues.
The recovery services are generally provided to large corporations because the percentage of mistakes is very small and therefore a large population of payments is required to find enough mistakes to make a recovery project worthwhile. It can take the auditor a long time to learn a client's business practices, find the mistakes and arrange the vendor reimbursements. Generally a company must have
annual revenues of $100 million dollars to be a suitable candidate for a recovery project.
Recovery audit firms offer their services purely on a contingency basis, so there is no financial risk to a customer. The onus is on the recovery firm to find mistakes. If no money is recovered from the vendors, no fees are charged.
In addition to the cash recoveries, the client receives feedback about the areas in which the recoveries were found,
and comments about internal procedures and controls. The client can use this added-value information to adapt its procedures to prevent similar errors from occurring in the future.
The invoice review is typcially done in the client's offices when the invoices
are manually filed. Nowadays, with more companies using document imaging
software, invoice review can be done off-site with a login to the image server. This
reduces any distraction having another auditor in your office, is safer and
improves efficiency by eliminating commuting time.
Recovery auditing is a relatively new industry, having started in the United States less than 50 years ago. It began in the retail trade where
extensive adjustments for discounts, allowances, advertising, seasonal deals,
freight and other items were hard to track, especially with manual methods. The rise of computers enabled more sophisticated data mining techniques. Today there are electronic methods to manage discount programs and specialized software
is available to find duplicate payments as well as to manage the collection process. Most large companies are aware of the benefits and have their files examined periodically to ensure nothing has fallen through the cracks.
Many of the larger public accounting have added recovery auditing to their services
but many have eliminated the services because of regulations intended to
have them maintain independence from their financial statement audit
servicess. Congress legislated forced independence as part of the sweeping Sarbanes-Oxley legislation in
More recently, large companies have adopted software techniques to identify
duplicate payments prior to payment. Internal audit departments are becoming more diligent looking for opportunities to repatriate misspent funds and keeping the fees otherwise paid to outsiders; however, recovery firms still make an impact especially with electronic methods manipulating large data sets.