6 Audits that Recover Cash | Audit, Data, Litigation, Mediation, Risk
6 types of cost recovery audits your business can do to find overpayments and get a refund. Accounts payable, payroll, vendor contract, sales tax, lease, and insurance premium.
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6 Audits that Recover Cash

Cost Recovery Audits Christina Durta CPA Panama City FL

6 Audits that Recover Cash

How about this concept…audits that get your money back? That’s right. Instead of looking at audits as having lemons, make lemonade. There are 6 types of audits your business can do right now that can actually put cash in the bank. They will help you recover costs now and save money in the future. Every business has expenses and typically there are errors and overpayments that can be refunded. It’s just a matter of finding them and then curtailing it in the future.

Say for example that your business spends $1 million dollars per year on expenses. If a mere 2.5% of those expenses were paid in error and could be recovered or saved, that equals $25,000. Over ten years that’s $250,000, etc. Can add up very quickly. So, I pose the question….why would anyone not audit? Do you like throwing money away?

NO!!

6 COST RECOVERY AUDITS TO DO ASAP

 

THE ACCOUNTS PAYABLE AUDIT

Accounts payable audits typically focus on duplicate payments, missed payment discounts, price discrepancies, and forgotten credit memos. In some businesses, duplicate payments alone account for 1% of payment errors. Other purposes may be to ensure that invoice amounts match purchase orders, payments aren’t being made late (incurring fees and interest), capital purchases aren’t broken into smaller invoices to avoid authorizations, as well as analyzing spending. Fraud is always a concern. It is important to look for gaps in check numbers, even dollar payments, unusual descriptions, unauthorized vendors, checks sent to the same address as employees, and spending above approved amounts. The entire accounts payable process should routinely be reviewed for efficiency and accuracy.

 

THE PAYROLL AND BENEFITS AUDIT

Payroll audits ensure that payments have been made correctly for base wages, overtime, bonus, and benefit accruals. Tax calculations should be checked to determine if the correct amount was paid, especially if you are using a third party to run your payroll. Don’t just assume it’s correct. Potential errors are duplicate payments, miscalculations, unauthorized changes, incorrect accruals of paid time off, and payments to terminated employees. Beyond that, payroll records should be checked to find out if there is missing information or duplicate information such as two employees having the same social security number or bank account number. This information should be checked against vendor files as well to catch fraudulent payments to employees, their friends, or relatives. You can also get a list of commercial rental mail boxes to see if you have any ghosts on your payroll.

 

THE VENDOR CONTRACT AUDIT

You spend a great deal of time and money to negotiate the best possible contract terms with vendors, but how often are you checking to make sure that those provisions are actually being upheld? Deviations from pricing, shipping, and fulfillment quotas can be very costly and disruptive to your operations. Non-financial contract terms such as limitations on entertainment and gifts to your employees should be reviewed as well to uncover potential abuse and favoring of specific vendors. Put your vendors on notice that it won’t be tolerated and make them show you anything they have given or paid for one of your employees. Spending by vendor and purchasing agent should be continually analyzed to ensure that you are getting competitive pricing and terms. Sometimes businesses get so comfortable in their relationships with vendors that they don’t realize that over time the prices start creeping up to much more than they would pay somewhere else.

 

THE SALES AND USE TAX AUDIT

Sales and use tax audits usually serve two purposes: finding overpayments to seek a refund or defending you in an audit by the state. Sales tax paid on purchases that should be exempt or duplicate payments on the same transaction can be costly. Every attempt should be made to locate these errors and file for a refund where appropriate. Companies operating in multiple states have complex issues with nexus. Knowing which state rules is applicable can be tricky and you don’t want to be paying taxes on the same amount in two different states. Should you find yourself in a sale tax audit and the government is asserting an underpayment, you don’t want to just take their word for it. Do an audit yourself and so you challenge their findings with fact.

 

THE REAL ESTATE LEASE AUDIT

Businesses that lease commercial space are charged pass through expenses for taxes, utilities, common areas, janitorial services, landscaping, insurance, security, and other maintenance. Generally it is up to the tenant to review the landlord’s records to find out if they are being charged the appropriate amount of operating expenses and taxes. The terms of your lease should give you the right to do that. What are you supposed to just take their word for it?Incorrect billing is common and if it is never reviewed, it is subject to abuse. If you have a detailed negotiated lease, it is possible to recover funds already paid and to reduce these expenses in the future. Letting the landlord know that you have your eye on the ball is a definite deterrent.

 

THE INSURANCE PREMIUM AUDIT

Many insurance rates are based on annual payroll, gross sales, or some other unit of measurement. This is very typical of workers compensation and general liability policies. It is important to understand how you are being charged and if any portion can be excluded from the rate computation. If you have any claims, make sure to review them for legitimacy and make changes to avoid these claims in the future. We all know people who supposedly were injured on the job and then are at home doing yard work while collecting a check. The job duties of employees should be monitored to prevent them from frequently doing work that would cause them to be rated higher if that isn’t their typical duties. For example, office personnel have the lowest rates, but if they routinely go into an area where equipment is being run, they could get the same rating as the operator. Records should also be maintained to make the computations clear, especially for any items which can be excluded.  The insurance company can and will do their own audit, so you want to be prepared and able to present yourself in the best light.

 

Ok great, now we know some potential areas to review, but how do we conduct these audits? Well, it takes rolling up your sleeves and digging deep into your transaction data. It’s not going to jump right off the page at you and that’s why it gets missed so often. People just don’t want to spend the time to look it over. But, haste makes waste. We use special computer assisted audit tools (software) to quickly analyze records. Some of that can be done in Excel or Access, it will just take much more time. Paper records also need to be manually reviewed and tied to the transactions. Using the computer assisted audit tools, 100% of the transactions are tested. The manual review is done on only some of the records. The number of records and how to randomly pick them are determined by statistical sampling, ie., you aren’t just taking a wild stab at how many to look at or how to choose them, it’s a mathematical computation based on risk.

It can take a significant amount of time and effort, but you have to decide how much your money is worth to you. If you are ok with throwing thousands of dollars away every year, then ignore it. But, if you want to stay as lean as possible and not waste, then start looking at internal audit as that friend who always has your back when you are in a tough spot.