By Richard B. Lanza, CPA, CFE, PMP

Ask any internal auditor and they will tell you that the regulatory compliance focus has impacted their ability to do financial, operational and system audits. A main reason is the shortage of skilled internal auditors and, as a result, much needed audits are not being done.

Cash recovery audits are stuck on the to-do-but-still-undone list, which is a shame given internal auditors can be an invaluable resource to a company by locating savings in a variety of areas: healthcare audits, advertising agency reviews, telecommunication audits, or a simple double payment to vendor review.   These are just a sample of the possibilities and given the specialized knowledge required, internal auditors should initially partner with a provider firm to ensure they have the necessary skills.  After the first couple of audits, they can perform such audits in perpetuity.

This article will focus on the top five reasons why internal audit departments are in the best position to complete cash saving reviews to the benefit of their department and the organization as a whole.

Reason #1 – Independence

Contracts should never be audited by the same department. Taking this simple truth a step forward, contract compliance audits should also not be completed by the same department. However, if a department insists on managing the audit, internal audit should still be included in the review because it will prevent departmental managers from brushing cost recoveries “under the table” while no one is looking.

Internal auditors are independent and have the company’s interests at heart. Therefore, internal audit can help locate and implement savings opportunities and potentially prevent a reoccurrence of any problems found. It may be embarrassing for the manager to get duplicate payments back from vendors because it requires the manager to contact vendors, explain control shortcomings of the company and request refunds. The internal auditor will try to better understand the shortcomings and suggest alternative processes and controls to minimize company risk going forward, regardless of who may be at fault.

Reason #2 – Shedding the “Gotcha” Role in Spite of Past Regulatory Focus

Working with department heads to find cash can help auditors shed the image of being in a “gotcha” role and instead to be seen as a finder of cash savings. When managers begin to see that internal auditors truly are there to help them, it can help to smooth ruffled feathers.

Internal auditors can help departmental managers get over their fear of finding savings within their department. The healthy role for the department manager is to admit fault and strive to fix the problem rather than covering it up. The more they are still proactively finding savings through recovery means, measuring it, and showing efforts to fix the issues, the better off they will be in the long run. Money talks and when an internal auditor finds savings for the company, departmental egos need to be put aside.

Cash recovery can help a department find the reason for increasing funds to themselves. For example, the author has seen how a massive savings in the accounts payable area after a recovery audit led to system improvements, more trained employees, and process enhancements. Without the up-front savings, the company is unaware of the impact and the benefit of improving operations. This can be said for many departments within the company (i.e., freight, telecom, health insurance, etc.).

Reason #3 – Allows Internal Audit to Gain Free Control and Technology Experience

Internal audit in the past has attempted to do these recovery projects on its own without asking for outside help. This is not suggested given:

• Internal auditors are not solely focused on finding savings as recovery providers. For example, a healthcare recovery auditor spends every day working to find savings in this area for a variety of companies while an internal auditor may only do one of these audits once every two years.
• Internal auditors simply do not have the bandwidth to do the work. The goal should be for an internal audit department to use a recovery auditor in the first and second year of the review. Not only does this initially provide the bandwidth for free (as most providers only charge when they find savings), but the department can use the cash savings and what they learned to suggest additional staffing for an internal department to do the work going forward.

Recovery audit procedures are mostly internal control reviews. Internal auditors learn from recovery auditors with specialized methods, technology, and people. Also note that recovery auditors focus on a given niche area and are able to see this area across many companies so best practices can be given to the internal audit department and company. The internal audit department should be comprised of individuals with diverse skill sets and experience to provide adequate control assurance to support the business on a broad range of risk and internal control matters. It very well might not be possible to accommodate all requisite technical skills in-house, therefore obtaining support from outside experts makes sense.

Internal auditors also don’t generally have the time to implement data analysis technology to support all facets of cash savings reviews, but recovery providers use their niche tools every day. This provides an excellent learning opportunity for internal audit personnel to use best practice recovery audit technology. Many providers have also developed continuous monitoring applications which have become a hot topic in the internal audit community and can be implemented on a go-forward basis after the initial audit finds savings to fund such investments.

Reason #4 – Internal Recognition

Internal auditors have a well-founded fear that if they land a recovery, they may not be recognized for their efforts. If internal audit lands a recovery the department head should present recovery figures to the CFO, but it’s important that it be noted that internal audit was responsible for the recovery.

By ensuring that internal audit gets credit for landing a recovery it can provide even further motivation for internal audit staffers to take the necessary steps in locating all possible instances of cash leakage. Furthermore, by demonstrating to department heads that found cash can be seen as a means of enhancing their already tight budgets it may be possible to move forward in a spirit of mutual cooperation. Shared recognition can be a powerful motivator in ensuring that the company’s best interests are protected.

Internal auditors also have the potential to put to good use the tips, secrets and process enhancements learned from recovery auditors to gain additional recognition moving forward.

Reason #5 – Cash is King

Probably the #1 reason to do recovery is the cost savings. Cash savings helps any department look like a star. Also, now that internal audit departments have beefed up budgets due mostly to Sarbanes-Oxley, the pendulum is starting to swing back where company management is starting to ask “What value am I getting for all this spend?

As an example of potential cash savings, with an industry standard duplicate payment error rate of 0.1% of payments, this can add up quickly, especially for companies with over $100 million in volume. By recovering overpayments, locating mistakes and instances of fraud, internal audit can earn a place at the table as a valuable source of income to the company and shed their reputation as being a cost center.

Understanding the specific role internal audit plays is not only to ensure control compliance, but that it can maintain its independence and still make the company money – and making money is one of the over-riding goals of every company.