Performing Cost Recovery Audits, Adding Value and Having Fun

As any kind of employee anywhere, it is always a good idea to keep track yourself of just exactly what value you add to your company or organization. This doesn’t have to be translated into dollars, although dollars are a common currency of relative value. For any type of nonprofit organization, the worth could be measured in terms of furthering the organizations mission or goals. Regardless of the circumstances, You would be wise to keep a perpetual log or journal of your significant accomplishments.


I think some internal auditors reject this kind of score keeping, especially when it’s based on a mandate by senior management. I disagree. If you are effective and rigorous in conducting at least an annual formal risk analysis, you should be hitting high value targets and area where there should be ample opportunity to document your worth. Obviously, there has to be some manner of flexibility in the assessment of internal audits contributions, but over time, if you are finding it difficult to justify your cost in some direct manner, I have to assume either you’re not doing the right things (poor risk analysis) or not doing things right (poor performance).


It’s OK to be creative, to generalize, to estimate, and to speculate some when putting together a tally of your accomplishments. This is often done on a monthly basis through regular performance reports, and then summarized annually.


My best work, using the straight dollar criteria, was at the supermarket company. In that business, vendors are constantly offering thousands of different deals and allowances for all sorts of activities. They will offer to pay $50 if the company features their item in a newspaper ad for a very specific 2 week period. They will offer a specific discount if the company buys a full truckload of a certain product during another specific time period. The variety of these different deals is endless, and they change constantly. The buyers are busy just keeping on top of their regular operations, and these deals and allowances are relatively small and insignificant individually, but they add up very quickly in a big company.


One aspect of the culture surrounding these deals is that the vendor’s rep may offer the deal to improve sales, but then try and make it difficult for the company to collect the deal (improving the salesman’s direct contribution to the vendor’s bottom line). One example would be by offering the deal verbally during a buying meeting, hoping the buyer will react to it and then forget to collect it. Most buyers do a pretty good job of collecting these. Some are not good at it. Some companies are very good about capturing these in their information systems and applying them. Others, not so much. Inevitably, there are many that get missed.


There are many independent audit companies that offer to come in and sweep up every scrap of paper and data and then go to work to identify valid deal offers that were missed, and then send a bill to the vendor for payment. The audit firm gets some negotiated percentage of the vendor payment , or recovery, and the company gets to keep the rest as free found money to the bottom line. It’s a good deal for both parties. But there are some tricks of the trade and aspects of the activity that are in the gray area. I can’t delve into those in any detail. But at my company, these outside auditors did VERY WELL for themselves. We were told one main reason was that they had knowledge and experience from auditing many other companies and they brought this specialized knowledge to bear on our behalf to secure special or secret deals we had no way of knowing about.


Well, it sounded good, but we are professional skeptics. So we decided to audit the auditors. We examined a sample of the invoices they sent to vendors and determined the root source of the deal. Was it something we should have known about? Was it something we had good documentation for but just missed? Were there specific buyers who just weren’t doing this part of their job well? Or was this special magic the outside auditor brought to the table?


The results of the analysis were a surprise. The documentation and justification for a vast majority of the recoveries were just sitting there in our records, waiting to be acted on and collected. So we created a new unit within internal audit and hired 5 low to mid level professional staff and a supervisor to comb through our files before we turned the records over to the outside auditors. The cost of this unit was in the $300,000 range back then. They ran into some rough times getting organized and oriented and trained and started but they persevered. And they broke even before the end of the first year. They were playing catch up with records from 3 years previous, but they picked up steam in the second year. Their third year of operation was my last year at the company. In that last year of operation, they worked through 2 years of records and got completely current, meaning they were essentially auditing in real time. the auditors were a good group of folks to work with and having that measurable performance goal to shoot for was an excellent motivator. They took well deserved satisfaction in their work and had fun, too.


And in that last year, the total (gross) they collected from vendors for 2 years of activity was about $2.4 million.


There is money everywhere. Sometimes it may just be sweeping nickels off the ground. But it’s there.

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This entry was posted on May 15, 2012 and is filed under Collections, Cost Reduction/Recovery, Retail Operations. Written by: . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.